In August of 1996, Congress passed legislation that affected small businesses and their use of tax qualified pension plans.
One such item was the SIMPLE retirement plan, which became available on January 1st, 1997.
SIMPLE stands for Saving Incentive Match Plan for Employees.
In order to establish a SIMPLE plan, the employer must have 100 employees or less and cannot maintain another tax qualified plan 403(b) plan, government plan, SEP plan or a 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.
Eligible employees can contribute up to 100% of compensation up to a maximum of $13,500 for the 2020. 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 $3,000 catchup 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 plans and 401K plans are somewhat 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?
In addition, law requires an employer which has established a SIMPLE plan must notify their employees by October 1st of each year that they have the option of enrolling.
Employers must choose from two different contribution methods upon establishing the plan and have the option of switching between these options each year.
Option 1: The Matching Option.
This requires the employer to match each participants contributions
dollarfordollar up to 3% of compensation. Please note that The Matching
Option also allows the employer to reduce the employers match to as little as 1% of
each participants compensation for ANY of two years in a five year period.
However, please keep in mind that if there are no other employees (other than the owner) participating in the plan - and you have selected Option 1 - then this issue can become irrelevant.
Contributions made to SIMPLE 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 participant withdrawals any amount from the account before two (2) years (after inception), they are subject to a 25% penalty (not the traditional 10%).
The Small Business & SIMPLE Plans
SIMPLE plans can be attractive to small businesses where we see increased demand from employees wanting tax qualified retirement plan options.
Providing you meet the qualifications and follow the rules, they can be easy to establish and maintain. The only potential downside is the contribution amounts have been ratcheted down from, for example, as compared to a traditional 401k.
Action To Take
Click HERE to obtain SIMPLE Plan information
For Faster Service Call 1-800-480-7526
Copyright © 1998
Fielder Financial Management, LTD.
All Rights Reserved.
Securities and investment advisory services offered
through Fortune Financial Services, Inc. member FINRA, SIPC.
Fielder Financial Management, Ltd. not affiliated with Fortune Financial Services, Inc. Mark Fielder, Financial Professional, CA. Insurance Lic. # 0690576.