Retirement Planning: Make it SIMPLE

Businesses that wish to make contributions to an employee retirement plan, but are concerned about the administrative burden and expense of 401k and other qualified plans, should consider a Savings Incentive Match Plan for Employees (SIMPLE).

SIMPLEs are available to companies that have 100 employees or less and don’t maintain any other qualified retirement plans. The employee threshold is based on the number of employees who earned $5,000 or more in the preceding calendar year. A SIMPLE may be set up as a SIMPLE IRA or a SIMPLE 401k. The remainder of this article focuses on SIMPLE IRAs, which are more flexible than SIMPLE 401k’s.

Although contribution limits for SIMPLEs are generally lower than other qualified plans, they are much easier to administer. Discrimination testing and annual tax returns aren’t required, and contributions for highly compensated employees don’t depend on the level of employee participation. Several important restrictions apply, however. For example, employer contributions are required, contributions are fully vested when made, and loans against a SIMPLE IRA are not permitted.

Contributions
Any employee who earned $5,000 or more in any two preceding years and is expected to earn $5,000 or more in the current year may defer up to $6,000 per year in salary through payroll deductions. The maximum annual contribution to an employee’s SIMPLE account, including employer contributions, is $12,000.

Employers may elect one of two methods of calculating required contributions:

• Matching contributions. The employer matches elective deferrals by employees, on a dollar-for-dollar basis, up to 3% of compensation. (This percentage may be reduced to as little as 1% for two out of any five years.)

• Nonelective contributions. The employer makes nonelective contributions of 2% of compensation on behalf of each eligible employee with at least $5,000 in compensation for the year. Compensation limits apply ($160,000 in 1998).

Distributions
SIMPLE IRAs are generally governed by the same distribution rules as regular IRAs, except that the penalty for early withdrawals from a SIMPLE IRA within the first two years of participation is increased from 10% to 25%. Employees can make tax-free rollovers from one SIMPLE IRA to another SIMPLE IRA or, after the two-year waiting period, to a regular IRA.

Additional Requirements
The employer must establish an annual, 60-day election period during which employees can enroll in the plan. Prior to the election period, the employer must (1) notify employees in writing of the opportunity to make, modify, or terminate a salary reduction election, and (2) provide employees with a description of the plan, including an explanation of the method and amount of employer matching or nonelective contributions.

A SIMPLE must be established by October 1 of the first plan year.