Overview of SIMPLE 401(k)s

What do you know about the SIMPLE 401(k)? Most business owners have heard of it, yet don’t know much about this retirement savings vehicle.

When times are tight, it might be an excellent choice. Do you have a business with fewer than 100 employees? Do you want to offer a low-cost retirement savings program without a huge capital outlay? The SIMPLE 401(k) may be worth looking into.

This small-scale 401(k) may prove less expensive for your company. A SIMPLE 401(k) doesn’t have to face the discrimination tests that come with traditional 401(k) plans.1 That can mean lower annual administrative costs for a business. (It also means that the salary deferral contributions of an owner and key employees are not limited by the amount of other employee deferrals.)

These 401(k)s have simple contribution formulas. An employer actually has two options when it comes to SIMPLE 401(k) contributions:

Option 1: fixed contributions. The employer simply directs 2% of each participating employee’s pay into the plan.

Option 2: matching contributions. Employees make elective contributions up to 3% of their pay, and the company is obligated to match these elective contributions up to an $11,500 limit in 2011. Employees 50 and older are permitted to make an additional $2,500 in catch-up contributions, so their limit is $14,000 for 2011.1,2

There is no vesting schedule. Any employer contribution to a SIMPLE 401(k) is fully vested as soon as it is made. This is a big difference from a standard 401(k). An employee doesn’t have to spend years waiting for complete control over 100% of his or her retirement plan assets.3

Loans and withdrawals are permitted. Employees may take loans and in-service withdrawals from a SIMPLE 401(k), although the 10% early withdrawal penalty looms if an in-service withdrawal is made before age 59½.4

Some details to remember. If you establish a SIMPLE 401(k), your company cannot have any other kind of qualified retirement plan. You also can’t elect to suspend employer contributions, a choice that you can make with a traditional 401(k) if desired. Should your business grow to where your payroll exceeds 100 employees, the IRS gives you a two-year “grace period” during which contributions to the plan may continue to be made. Lastly, please remember that since the SIMPLE 401(k) is a 401(k) plan, your business needs to file a Form 5500 each year with the IRS.1,4,5

 

 

 

Citations 

  1. irs.gov/retirement/article/0,,id=119625,00.html#Nondiscrimination [10/28/10]
  2. irs.gov/retirement/article/0,,id=96461,00.html [10/28/10]
  3. dol.gov/ebsa/publications/401kplans.html [11/10/10]
  4. irs.gov/retirement/article/0,,id=108945,00.html [10/29/10]
  5. benefitplans.com/Retirement_Plans/Qualified_Plans/DC_Plans/SIMPLE_401k/simple_vs_traditional.asp [10/5/10]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.