SIMPLE 401(k) Plans

 

Advantages of having a SIMPLE 401(k) Plan:

A SIMPLE 401(k) plan works very much the same way as a traditional 401(k) plan. Employees can choose to defer some of their salary and invest it into the plan.  The deferred money generally does not get taxed by the federal government or by most state governments until it is distributed. Unlike a traditional 401(k), a SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that a traditional plan must comply with. Employees may contribute more to this plan than under IRA plans but less than a traditional 401(k).  401(k) plans allow for participant loans and hardship withdrawals which add flexibility for employees.

 

SIMPLE 401(k) plans are generally less expensive to maintain than a traditional 401(k) plan or a defined benefit plan.

 

Who adopts a SIMPLE 401(k) Plan?

Businesses at least two years old with less than 100 employees can establish a SIMPLE 401(k) plan. SIMPLE 401(k) plans are attractive to any business owner that wants to avoid complicated non-discrimination testing. These plans are similar to SIMPLE IRA plans but allow for higher contribution limits. The Go401k Group offers a SIMPLE 401(k) administrative discount. LEARN MORE

 

Highlights:

Under a SIMPLE 401(k) Plan, an employee can elect to defer some compensation.  But unlike a regular 401(k) plan, 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).

 

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 - $11,500 in 2011.  If the employee is age 50 and over, an additional “catch-up” contribution is allowed.  The additional contribution amount is $2,500 in 2011.

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 is required.

 

Compliance Testing: Plan is not subject to annual non-discrimination testing.

 

Participant Loans:  Permitted.

 

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