Keep It SIMPLE

Offer New Retirement Plan Options
The Small Business Jobs Protection Act of 1996 introduced a new retirement planning vehicle for small employers, called savings incentive match plans for employees (SIMPLE). Similar to a simplified employee pension (SEP) and a 401(k) plan, SIMPLEs have some interesting aspects that may interest you.

SIMPLEs were enacted in response to taxpayers’ complaints about the cost and complexity of 401(k) plans, as well as the shortcomings of salary reduction simplified employee pension plans (SARSEPs). Unfortunately, SARSEPs have restrictions that are usually too great for most employers to overcome and consequently, very few were used. The SIMPLE addresses some of these restrictions.

A SIMPLE has two forms:

1. Individual retirement accounts (IRAs) set up for every eligible employee, and

2. Accounts in a 401(k) plan designed to meet the rules of a SIMPLE.

Regardless of the form used, no contributions to any other plan may be made during the year that a SIMPLE is used. SIMPLEs must be calendar year plans and require little or no plan administration and cost. They are exempt from complex discrimination testing, top-heavy rules and, if in IRA form, are exempt from ERISA fiduciary duties. They give the employee almost complete control over the funds. In addition, amounts contributed to a SIMPLE are fully vested at all times.

The centerpiece of a SIMPLE is an election by the employee to defer a portion of his or her salary and is similar to a 401(k) plan. The employee is given a 60-day period before the year end to make the election to defer. The employee may elect to defer any portion of his or her pay up to a maximum of $6,000. The employer matches the employee’s contributions up to 3% of pay, or contributes 2% of pay to all eligible employees regardless of whether they defer. In some cases, the 3% may be reduced. Owners and highly compensated employees will be able to defer up to $6,000, plus enjoy the employer match in the same proportions as other employees. There will be no further testing and no need to return excess contributions.

Aside from its simplicity, the most important aspect of a SIMPLE is that the contributions by the highly compensated do not depend on contributions by lower paid employees. In fact, there’s an employer incentive to not encourage contributions.

Beginning in 1999, 401(k) plans will have safe harbors, probably making the standard 401(k) plan better than a SIMPLE for the highly paid. In the interim, SIMPLEs will provide a viable alternative for many employers.