Question

Which of the following statements comparing a SIMPLE IRA with a 401(k) plan is correct?

            

(A)           The same amount of salary deferral is permitted for employees in both plans.

(B)           The participants are able to withdraw their money more easily from a 401(k) than from a SIMPLE IRA.

(C)           The employer may make matching and nonelective contributions with both plans.

(D)           If rank-and-file employees did not participate, a 401(k) plan would generally not work, but a SIMPLE IRA would still work.

Answer 1

In a simple IRA, an employer can match employee contributions up to 3% of the employees salary.

In addition, the employer can contribute a flat 2% of the employee's salary regardless of the employee's contribution upto a limit of $280000.

In a 401(k), the employer can make a matching contribution to the 401(k) or the employer can make an explicit profit-sharing plan.

Employer and employee contributions to a single employee’s 401(k) cannot exceed the lesser of the following two options:

1) 100% of the employee’s compensation.

2) The total cap, which is $56,000.

C) The employer may make matching and nonelective contributions with both plans.