Volume 37, Issue 7, July 2002
Compared to regular 401(k) plans, Savings Incentive Match Plan for Employees (SIMPLE) plans have more reasonable start-up expenses and less restrictive compliance requirements than other retirement plans. These advantages make it practical for certain small employers to introduce a retirement plan for their employees, although it will not be as flexible as a regular 401(k) plan. Following is a summary of the benefits and disadvantages of starting a SIMPLE plan:
To be eligible for a SIMPLE plan, an employer can't have another retirement plan and can't have more than 100 employees who earned at least $5,000 compensation in the previous year. For eligibility, employees need at least $5,000 in compensation from the employer in any two past years, plus they must be expected to earn at least $5,000 during the current year. Self-employed individuals are also eligible.
An employer can choose to set up the SIMPLE plan as a 401(k) salary deferral plan or as an IRA for each employee. With an IRA SIMPLE plan, the maximum annual employee contribution is $7,000 adjusted annually for inflation (This number increased from $6,500 in the beginning of 2002. The amount then increases $1,000 each tax year thereafter until it reaches $10,000 in 2005). The employer has two tax-deductible matching alternatives:
Generally, the employer must match 100 percent of employee contributions
up to 3 percent of each individual's compensation. (The employer may also elect
a lower match that is no less than 1 percent of employee elective contributions.
But this lower match option can be used in only two out of any five years.)
The employer can contribute 2 percent of compensation on behalf of each
eligible employee even if an employee makes no elective contributions.
Employees' elective contributions are income-tax deferred.
A 401(k) SIMPLE plan allows employees to make tax-deferred contributions, up to an annual maximum of $6,000. The employer, in general, must match 100 percent of employee elective contributions up to percent. Alternatively, the employer must automatically contribute 2 percent of pay for each eligible employee.
Employers frequently report they do not offer a
retirement plan because of the testing and administrative difficulties involved.
Some of those difficulties disappear with a SIMPLE plan. Following are some
have the special nondiscrimination tests for 401(k) plans--annual deferral
percentage and annual contribution percentage--or the top-heavy rules;
complicated reporting requirements than for a standard 401(k) plan;
require the employer to monitor vesting requirements and company participation;
companies whose employment rises over the 100-employee limit a two-year grace
period to change plans.
A SIMPLE plan also has a downside due to the
ongoing cost. A SIMPLE plan requires the employer to make contributions;
limits on employee deferrals that are lower than standard 401(k) plans ($6,000
instead of a 401(k)'s $9,500 for 1997);
100 percent vesting requirement in all company contributions for qualified
employees, regardless of the length of employment;
withdrawal penalty of 25 percent instead of a 401(k)'s usual 10 percent;
on introducing another retirement plan while the SIMPLE plan is in effect.
The ease of set-up and lower compliance demands make a SIMPLE plan appealing. But whether or not a SIMPLE plan would be a good move for your business is a decision that must be based on your specific circumstances and needs.
Clark Mangan is a financial advisor with the Mangan, Ernst & Rankin Wealth Management Group of First Union Securities in Marlton, N.J.
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