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SIMPLE Retirement Plan

The Small Business Job Protection Act of 1996 created an entirely new type of retirement plan called "SIMPLE," an acronym which stands for "savings incentive match plan for employees." It is available for any business which: 

bulletHas 100 or fewer employees (including employees of related entities).
bullet Does not maintain another tax-qualified retirement plan to which contributions are made. 
bulletCan be either an incorporated or unincorporated firm.

How It Works

bulletEmployee has the option of taking cash, or having it contributed to the trust for retirement. This is equivalent to the employee making a pre-tax contribution.
bulletMandatory employer contributions are tax-deductible to the business. IRC Sec.404(a)
bullet Employer contributions are not taxed currently to the participants. IRC Sec. 402(a)
bulletEarnings accumulate income tax deferred. IRC Sec. 501(a)
bullet Participant contributions must be deposited by the employer within 30 days after the end of the month for which the contribution was made.
bullet There are two different types of SIMPLE plans which, although similar, do have distinct differences. There is an IRA version and a 401(k) version.

IRA Version

  • Individual IRA for each participant.
  • Any employee who received $5,000 or more of income during any 2 prior years and is expected to earn $5,000 during the current year must be eligible.
  • Vesting is 100%
  • Employee Contributions - Voluntary up to $6,000, may not exceed 100% of compensation.
  • Employer Contributions
  •      Option 1# - Employer match dollar for dollar up to 3% of compensation
  •      Option 2# - Employer contributes 2% of compensation to all eligible employees whether they defer or not

 401(k) Version

bullet Cash or deferred profit sharing plan.
bullet Regular qualified plan rules apply, such as:
bullet     Minimum age of 21
bullet     1 year of service
bullet     1000 hours
bullet Vesting is 100%
bullet Employee Contributions - Voluntary up to $6,000, may not exceed 100% of compensation.
bullet Employer Contributions
bullet     Option 1# - Employer match dollar for dollar up to 3% of compensation
bullet     Option 2# - Employer contributes 2% of compensation to all eligible employees whether they defer or not

Advantages To Employer

bulletUnlike 401(k) plans, the employer knows in advance approximately what the financial commitment will be.
bulletEmployer contribution is tax deductible.
bulletThe plan is easily understood by employees.
bullet The 401(k) version of the plan can provide employees with permanent life insurance benefits that need not expire nor require costly conversion at retirement age.
bulletThe employer can direct employer investments.

Advantages To Employees

bulletParticipant deferrals are made with pre-tax dollars.
bulletEmployer contributions are not currently taxable to participant.
bulletIn the 401(k) version, retirement benefits may receive tax-favored treatment, such as income averaging.1 Distributions from the IRA version are taxed in the same manner as a traditional IRA.
bulletParticipants have right to direct investment.
bulletParticipants may also have a traditional, deductible IRA, or Roth IRA, subject to certain income level limitations based on filing status.
bulletIn the 401(k) version there is the ability to purchase significant permanent life insurance which is not contingent upon the company group insurance program. Purchase of life insurance will generate taxable income to the employee (PS 58).
bulletYounger employees can accumulate a larger fund than with a defined benefit plan.
bulletIf the 401(k) plan permits, participants can borrow from the plan, within the requirements of the plan and the law. Sole proprietors, more than 5% shareholders in an S corporation and more than 10% partners in a partnership may not borrow.
bulletIn the 401(k) version, if the plan permits, participants can make hardship withdrawals within the requirements of the plan.

Disadvantages To Employer

bulletThe employer is required to contribute.
bulletThe more highly paid participants may not be able to contribute sufficient funds to build an adequate retirement. This may bring pressure on the employer to provide additional retirement benefits.
bulletWhile called a "SIMPLE" plan, in operation it is not nearly as simple as often thought.

Disadvantages To Employees

bulletThere is no guarantee as to future benefits.
bulletInvestment risk rests on the participant.
bulletThere are no forfeitures to reallocate as under other types of defined contribution plans.
bulletFor older employees, there may not be sufficient time to accumulate a decent retirement fund. Other types of defined contribution plans can provide a better retirement benefit for older workers.



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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017