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SIMPLE 401k Plans

Generally, those who consider a SIMPLE 401k are comparing them to SIMPLE IRA's.  Which is right for your group?  Below is a summary of both plans that shows SIMPLE 401(k)'s vs. SIMPLE IRA's.
Savings Incentive Plan for Employees (SIMPLE plans).

There are two types of SIMPLE plans: SIMPLE IRAs and SIMPLE 401(k)s.  Both are simplified retirement plans designed for small employers with 100 or fewer employees.  Each plan allows for voluntary employee pre-tax deferrals equal the lesser of 100% of compensation or the maximum deferral limit. The maximum limit is:







The employer is required to make a contribution to the plan.  The employer may choose from the following contribution options:  A non-elective (basic) contribution of at least 2% of compensation for all eligible employees earning at least $5,000; OR at least 100% matching contribution up to the first 3% compensation. With SIMPLE IRA plans only, the employer has the option to reduce the matching contribution as low as 1% for no more than two out of five years ending with current year. The option to reduce the matching contribution below 3% is not available with SIMPLE 401(k) plans.

Withdrawal amounts form a SIMPLE IRA during the first two years of participation would generally be subject to a 25% penalty tax; the normal 10% penalty applies afterward.  The employee must always be 100% vested in both employee deferrals and employer contributions.

To offer a SIMPLE plan, employers must satisfy two requirements:

1. During the previous year, the employer had 100 or fewer employees who earned at least $5,000, and
2. The employer does not sponsor any other retirement plan (i.e. qualified plan, 403(b), or SEP).

Although employers can open plans up to more employees, the minimum requirement is that employees are eligible if they earned at least $5,000 from the employer during the previous two years and it is reasonable to expect that they will earn at least $5,000 during the current year.


 
Year
SIMPLE Elective Limit
Age 50+ Catch-up
2004
$9,000
$1,500
2005
$10,000
$2,000
2006 on
$10,000
$2,500
SIMPLE 401k vs. SIMPLE IRA:
A SIMPLE 401(k) is a qualified plan. Therefore the 415(c) (annual additions) and the compensation ($220k) limits will apply.  As with other qualified plans, a SIMPLE 401(k) plan must meet the reporting, disclosure, fiduciary responsibility, age, service, and coverage requirements.  However, SIMPLE 401(k) s are deemed to satisfy the ADP, ACP, and top-heavy requirements.

Example:

Q.  John works for an employer that offers a SIMPLE 401(k).  John makes $300,000 and his employer uses a matching formula.  How much can John defer?  What is the amount of his employer match?

A.  John can defer 100% of compensation (up to $220,000) not to exceed $10,000.  John can defer $10,000 in 2005.
Employer is matching 100% of deferrals up to 3% of compensation.  John's compensation is limited to $220,000.
Employer match = 0.03 x $220,000 = $6,600. 

For the SIMPLE IRA, the 415(c) limit and the compensation limit do not apply.  The SIMPLE IRA is an IRA plan so there is no salary maximum.

Example:

Q.  John works for an employer that offers a SIMPLE IRA.  John makes $300,000 and his employer uses a matching formula. How much can John defer? What is the amount of his employer match?

A.  John can defer 100% of compensation not to exceed $10,000.  John can defer $10,000 in 2005.  Employer is matching 100% of deferrals up to 3% of compensation . John's compensation is not limited. 
Employer match = 0.03 x $300,000 = $9,000

Note that although there is no compensation maximum with SIMPLE IRA's, the employer matching contribution cannot exceed the amount of the employee elective deferral.

Example:

Q.  John works for an employer that offers a SIMPLE IRA. John makes $500,000 and his employer uses a matching formula. How much can John defer? What is the amount of his employer match?

A.  John can defer 100% of compensation not to exceed $10,000.  John can defer $10,000 in 2005.  Employer is matching 100% of deferrals up to 3% of compensation.  John s compensation is not limited.
Employer match = 0.03 x $500,000 = $15,000 but employer match can not exceed amount of the employee deferral. Therefore, the employer matching contribution is limited to $10,000.
.
For many employers, the benefit of a SIMPLE IRA outweighs that of a SIMPLE 401k.
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