SIMPLE Plans as Benefits
Employers with no more than 100 employees may set up a savings incentive
match plan for employee (SIMPLE). In effect, SIMPLE plans trade off lower annual
contribution limits for ease of administration. Thus, they're generally cheaper
and easier to operate than other retirement options, but you can't save as much
for retirement each year as you can with the other options.
Here are the basic rules:
- A SIMPLE must be the only retirement plan you offer.
- The funding mechanism can be either an IRA
or a 401(k)
- The employee may contribute up to $7,000 annually in 2002 ($6,500 in 2001;
this amount will be adjusted annually). Those who are age 50 or over in
2002, can contribute an additional $500 for the year.
- The employer must either match each participating employee's contribution
up to 3 percent of the employee's pay or make an across-the-board 2 percent
contribution for all eligible employees with at least $5,000 in annual
compensation, regardless of whether they participate in the plan. In the IRA
form, employers can elect to limit the match to a minimum of 1 percent of
all eligible employees' compensation, but this election can only be made in
two out of every five years. These are the only permitted contributions —
the maximum contribution total for any employee (or yourself) would be
$14,000 for 2002 ($13,000 for 2001).
- Employees vest immediately in all contributions made to their account, by
themselves or the employer.
- In the IRA form, only employees that received at least $5,000 in annual
compensation in the preceding two years and who are reasonably expected to
receive this amount of compensation in the current calendar year are
eligible to participate. In the 401(k) form, eligible employees are those
who received at least $5,000 in compensation during the preceding year and
who are reasonably expected to receive this amount of compensation during
the year in question.
- In the IRA form, your plan is exempt from all nondiscrimination and
top-heavy rules. In the 401(k) form, it is exempt from the special
nondiscrimination rules and from the top-heavy rules, but it still must meet
regular nondiscrimination and coverage rules.
- Employers may take a deduction for contributions to the employees'
- There are no reporting requirements imposed on the employer except for a
single report to the government when the plan is created (employers do have
to notify employees as to account balances, investment performance, etc.).
- A distribution to an employee during the first two years after the plan is
created is subject to a 25 percent excise tax. After two years,
distributions to anyone under age 59 1/2 is subject to a 10 percent excise
- Upon separation from employment, distributions may be rolled over tax free
to an IRA or to another SIMPLE plan. Beginning in 2002, distributions from
the IRA form of SIMPLE accounts that an employee has participated in for at
least two years can be rolled over into other types of retirement plans,
such as employer qualified plans and deferred compensation plans of exempt
employers, organizations and public schools.
One of the more interesting aspects of SIMPLE plans is that, although you
must offer the plan to all eligible employees, you can still set up the
plan even if none of your employees wants to participate. That is not true of
other plans. Of course, there are strict rules and heavy fines for business
owners who don't properly give employees the option of joining.
If you're interested in setting up a SIMPLE plan, contact anyone who might
offer IRAs or 401(k) plans, such as banks, insurance companies, or investment