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SIMPLE 401(k) Plans

A new subset of the 401(k) plan is the SIMPLE 401(k) Plan.  Just like the SIMPLE-IRA, this is a plan just for you: the small business owner with 100 or fewer employees.  However, just as with the SIMPLE-IRA, there is a two-year grace period for growing businesses.

  • SIMPLE is an acronym for Savings Incentive Match Plan.

  • SIMPLE 401(k) is a type of profit sharing plan under which participants can voluntarily contribute a portion of their salary on a pretax basis.

  • SIMPLE 401(k) plans are available for employers with less than 100 employees. It is a good choice for the employer who wants a low-cost employee fringe benefit. The plan is funded partially with employee pretax contributions. Thus, a relatively small capital outlay can provide a highly visible employee benefit program.

  • Employee salary deferrals are limited to $6,000 in 1998.

  • The employer is required to make contributions. These contributions can take the form of either a 2% of pay contribution for all eligible employees or a matching contribution of 100% of each participant's salary deferral up to a maximum of 3% of pay. No other employer contributions may be made to the plan.

  • There is no nondiscrimination testing for these plans. The highly compensated employees' deferral contributions are not limited by the amount of the non-highly paid employees' deferrals.

  • No other Qualified Plan may be maintained while the employer sponsors a SIMPLE 401(k).

  • Immediate vesting is also required.

Under a SIMPLE 401(k) Plan, an employee can elect to defer some compensation.  But unlike a regular 401(k) plan, you the employer must make either:

  1. A matching contribution up to 3% of each employee’s pay, or

  2. A non-elective contribution of 2% of each eligible employee’s pay.

No other contributions can be made.  The employees are totally vested in any and all contributions.

If you establish a SIMPLE 401(k) Plan, you:

  • Must have 100 or fewer employers.

  • Cannot have any other retirement plans.

  • Need to annually file a Form 5500.

The IRS has issued Model Amendments for SIMPLE 401(k) Plans.  These Model Amendments permit a 401(k) plan to become a SIMPLE 401(k) Plan (if the other requirements are met).

Information List

Pros and Cons:

  • Plan is not subject to the discrimination rules that everyday 401(k) plans are.

  • Employees are fully vested in all contributions.

  • Straightforward benefit formula allows for easy administration.

  • Optional participant loans and hardship withdrawals add flexibility for employees.

  • No other retirement plans can be maintained.

  • Withdrawal and loan flexibility adds administrative burden for the employer.

Who Contributes:  Employee salary deferrals and Employer contributions.

Contribution Limits:
Employee - $9,000 in 2004 with annual increases in $1,000 increments until the limit is $10,000 in 2005.  If the employee is age 50 and over, an additional “catch-up” contribution is allowed.  The additional contribution amount is:  2004 - $1,500 ; 2005 - $2,000 ; and 2006 - $2,500.

Employer - A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee.

Filing Requirements:  Annual filing of Form 5500 may or may not be required.

Who May Not Have To File
You do not have to file Form 5500-EZ (or Form 5500) for a plan year (other than the final plan year) that begins on or after January 1, 2007, if you meet the five conditions above and you have one or more one-participant plans that separately or together had total assets of $250,000 or less at the end of that plan year.

Example for plan years beginning on or after January 1, 2007. If total assets in a plan (or in two or date more plans, separately or together), that otherwise
satisfies the requirements for filing the Form 5500-EZ, exceeded $250,000 at the end of the 2007 plan year, a Form 5500-EZ must be filed for the 2007 plan year.

Final plan year. All one-participant plans should file the Form 5500-EZ for their final plan year indicating that all assets have been distributed. The final plan year is the year in which distribution of all plan assets is completed. Check the “final return” box at the top of Form 5500-EZ if all assets under the plan(s) (including insurance/annuity contracts) have been distributed to the participants and beneficiaries or distributed to another plan.

Source: www.IRS.gov

Participant Loans:  Permitted.

In-Service Withdrawals:  Yes, but subject to possible 10% penalty if under age 59-1/2.

For details on the difference between a 'traditional' 401(k) and a SIMPLE 401(k) - Click Here

SIMPLE 401(k)'s should not be confused with SIMPLE IRA's. For a comparison chart to note the difference between a SIMPLE 401(k) and a SIMPLE IRA - Click Here


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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM


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