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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.
The SIMPLE 401(k)
Eligible employees can contribute up to 100% of compensation up to a maximum of $11,500 for the 2009. This amount elected by the employee may be expressed as a percentage of compensation or as a specific dollar amount. Additionally, if you are age 50 and older you may be able to make an additional annual $2,500 catch–up elective deferral contribution.
These amounts are available 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:
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.
Employers must choose from two different contribution methods and have the option of switching between these options each year.
Option 1: The Matching Option. This requires the employer to match
each participant’s contributions dollar–for–dollar up to 3% of compensation
but no more than $11,500 for the 2009 plan year. This would apply to investors under
age 50. For investors over age 50 it is $14,000 for 2009. Please note that The
Matching Option also allows the employer to reduce the employer’s match to as little
as 1% of each participant’s compensation for ANY of two years in a five year period.
Option 2: Non–Elective Contribution Option. This requires the employer to
contribute 2% of each eligible employee’s compensation each year up to a maximum of
$4,900 for 2009 regardless of whether the participant contributes or not. There is
one limitation, however. The maximum annual compensation on which contributions can
be based is $245,000 for the 2009 tax year.
More Facts
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%).
Small Businesses & SIMPLE Plans
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, as compared to a traditional 401(k). The trade off, of course, is less administrative work.
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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Fielder Financial Management, LTD.
All Rights Reserved.
Securities are offered through Girard Securities, Inc.
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Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.
