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In order to establish a SIMPLE plan, the employer must have 100 employees or less and cannot maintain another tax qualified retirement plan, 403(b) plan, government plan, SEP or 501(c)(3) plan.
However, if at some future point, the business does expand its base of employees and exceeds the 100-person limitation, the employer may continue using the SIMPLE plan for a period of two (2) years only.
SIMPLE plans now replace Salary Reduction Simplified Employee Plans (SARSEP's). If you have an existing SARSEP you may continue using it, but establishing a new one is not allowable.
SIMPLE plans may be set up by self-employed persons as well as corporations, and can be established as a part of a 401(k) plan or IRA.
Under current law, a SIMPLE 401(k) plan allows elective salary deferrals to a maximum of $10,000, providing the participant has received $5,000 of compensation in the preceding year.
Although the rules for SIMPLE 401(k) plans and regular 401(k) plans are very similar, where they differ lies in the absence of having to comply with non-discrimination tests and top heavy testing, providing:
SIMPLE IRA contributions are not subject to the same $4,000 cap as a traditional IRA maintains. Instead, the amount one can defer is $10,000 total. This amount must be expressed as a percentage of annual compensation. Maximum contribution (employer & employee) that employer can deduct is a full $20,000 ($10,000 employee contribution + $10,000 employer match) - making this a very attractive plan.
Like the SIMPLE 401(k), the participant must have received at least $5,000 in compensation during the previous 2 years and expect to receive at least that much the current year.
Participants must be allowed to end their participation in the program at any time and may participate in another employer-sponsored pension plan, providing it is not deemed a controlled group situation. Under these circumstances, the maximum amount or contributions cannot exceed $10,000. Employees 50 years old and older may make a $2,500 catch-up contribution
What is the deadline for SIMPLE IRA contributions?
The deadline for SIMPLE contributions is the tax filing deadline of the company, including
extensions. For a previous year contribution, the SIMPLE plan must have been established
by October 1st of the year for which the contribution is being made.
As regards employer contributions, the employer is required to match up to 3% of the participant's compensation for the year, match deferrals up to a lower percent of compensation, but the match can be as low as 1%, in no more than 2 out of 5 years. Or the employer can opt to make non-elective contributions of 2% of compensation for each participant.
Contributions which are made to either a SIMPLE 401(k) or a SIMPLE IRA are not includable in the employee's taxable income. However, they are counted as wages for FUTA, FICA and Medicare.
Secondly, all earnings accumulate tax deferred until withdrawn and are generally subject to the same rules and regulations governing IRA's pre age 59 1/2 withdrawal penalties, mandatory 70 1/2 distribution, etc).
However, unlike the regular IRA, if a SIMPLE IRA participant withdrawals any amount from the account before two (2) years (after inception), they are subject to a 25% penalty (not the traditional 10%).
SIMPLE 401(k) and SIMPLE IRA's are especially attractive to small businesses where we see increased demand from employees wanting qualified retirement plan options and executive perks.
Providing you meet the qualifications and follow the rules, they definitely are "simpler" to establish and maintain. The only potential downside is the contribution amounts have been ratcheted down from, for example, traditional 401(k) elective deferrals and the optional employer matches up to $30,000.
Action
To Take If you would like to learn more about SIMPLE PLANS and the various funding options available, please click HERE.
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