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 1^st, 1997.

SIMPLE stands for Saving Incentive Match Plan for Employees.

Qualification

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.

Contribution Allowances

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 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 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:

• Deferrals do not exceed $13,500 per person
• All contributions are vested
• The plan sponsor elects to match the employee's deferrals up to 3% of the participant's wages, or under a non-elective option 2% of the total compensation for the eligible employee.

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.

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.

Employer Contributions

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 participant’s contributions dollar–for–dollar up to 3% of compensation.  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 IRS mandated amount regardless of whether the participant contributes or not. 

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