| Pension & Retirement / "SIMPLE" retirement plans and simple 401(k) plans |
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This type of plan is targeted at
businesses with 100 or fewer employees, and is designed to offer greater
income deferral opportunities than individual retirement accounts
(IRAs), with fewer restrictions and administrative requirements than
traditional pension or profit-sharing plans.
Under a SIMPLE plan, any employee
with compensation of at least $5,000 must be permitted to enter a
"qualified salary reduction arrangement." Under this
arrangement, an employee can elect to have a percentage of compensation
not in excess of $6,000 (as indexed for inflation) for any year set
aside in an IRA, instead of receiving it in cash. For 2001, this maximum
amount of employee contributions to the SIMPLE IRA is $6,500. Amounts
taken out of the employee's salary for this purpose are not taxed to the
employee until withdrawn from the SIMPLE IRA. Early withdrawals may be
subject to a 10% penalty (25%, if the withdrawal is made within the
first two years). Under a qualified salary reduction
arrangement, the employer must make "matching" contributions
to the SIMPLE IRA. That is, the employer must make contributions to an
employee's SIMPLE IRA in the same amount as the employer contributed
under the employee's salary reduction election, up to 3% of the
employee's compensation. For example, if an employee with compensation
of $50,000 elects to have 10% of his pay contributed to the plan
($5,000), the employer must contribute an additional $1,500 (3% of
$50,000). For these purposes, an employee's compensation is the amount
reported on his Form W-2, plus the amount of elective deferrals (e.g.,
the amount of the salary reduction contributed to the SIMPLE IRA). But
the matching contribution cannot exceed $6,000 (as indexed for
inflation) for any year. For 2001, the maximum amount of matching
contributions is $6,500. If an employer wishes to contribute
less than 3%, he can give employees proper notice and drop the
contribution to as low as 1% of compensation, as long as this isn't done
for more than two years out of the five-year period ending with the year
of reduced contributions. Alternatively, instead of making
"matching" employee contributions, the employer can simply
contribute a flat 2% of "compensation" (limited to $150,000,
as adjusted for inflation—$170,000 for 2001), for every employee
eligible to participate in the plan, whether the employee elects to
reduce his salary or not. Special notice must be given to employees if
the employer wishes to take this approach.
Instead of adopting a simple
retirement plan, an employer can set up a SIMPLE 401(k) plan. By making
matching contributions (or 2% nonelective contributions) and satisfying
rules similar to those for simple plans, SIMPLE 401(k) plans will be
considered to satisfy the otherwise complex nondiscrimination test for
401(k) plans. The contribution rules for SIMPLE plans apply to simple
401(k) plans, except that if an employer adopts the matching
contribution approach (instead of the flat 2% option), the maximum
contribution percentage cannot be dropped below 3%. Unlike a SIMPLE
plan, a SIMPLE 401(k) plan is part of a qualified plan, and is subject
to the qualified plan rules. Under the new law, employer contributions
to SIMPLE 401(k) plans are not subject to the 15 percent limits on
contributions to profit-sharing or stock bonus plans. SIMPLE plans have the advantages of simplified reporting requirements and the absence of the qualification rules prohibiting the plan from discriminating against lower-level employees. Some employers may consider the contribution requirements a disadvantage. Additionally, to be eligible to adopt a SIMPLE plan, an employer must not contribute to, or accrue benefits under, any qualified retirement plan for services provided during the year (or in any year after the qualified salary reduction arrangement takes effect). But employers that maintain a plan for collectively bargained employees can maintain a SIMPLE plan for noncollectively bargained employees. A restriction similar to the "exclusive plan requirement" applies to SIMPLE 401(k) plans, but only for services provided by employees eligible to participate in the SIMPLE 401(k) plan. |
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