The Right Plan?

SIMPLEs offer several benefits (see main article), but there are a few limitations that come with having this type of plan.  For example, the SIMPLE contribution limits are lower than other retirement plans.  Employees participating in a 401(k) plan can defer up to $17,500 (with a $5,500 limit for catch-up contributions), whereas the 2014 limit on SIMPLEs is $5,500 lower than that on deferrals, and $3,000 lower for the catch-up contributions.

SIMPLEs may be less flexible than some other plan options.  Employers must make annual contributions once they establish the plans, and the contributions have to fall within certain ranges.

Finally, as with many retirement plans, early withdrawals can have costly penalties.  Employees who withdraw money from a SIMPLE before reaching age 59½, typically have to pay a 10% penalty, in addition to income tax on the amount withdrawn.  (In limited circumstances, the penalty will not apply.)  Moreover, if the withdrawal occurs within the first two years of the employee’s participation, the penalty increases to 25%.

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