APS
Pension and Financial Inc.
Savings Incentive Match Plans for Employees (SIMPLE Plans) The new SIMPLE plans give small employers an opportunity to offer most of the options of 401(k) plans to their employees without much of the complexities and administration. This is the first successful attempt to simplify pension plans. Along with the introduction of SIMPLE plans for 1997, SARSEPs, or salary reduction simplified employee pension plans, no longer are available beginning in 1997. Any SARSEPs in existence of December 31, 1996, may continue, but no new SARSEPs may be adopted after that date. This rule does not affect SEPs without salary reductions. The new SIMPLE plans are available to employers with 100 or fewer employees who receive $5,000 or more in compensation from the employer in the preceding year if they do not currently maintain another qualified plan. Rather than the $9,500 current limit on 401(k) plans, the SIMPLE plans limit deferrals to $6,000 to be indexed as 401(k) plan limits are indexed. In addition, SIMPLE plans require employer contributions in the form of a matching contribution or in the form of an across-the-board contribution to all eligible employees. SIMPLE plans may be structured as either IRAs or 401(k)s, each with some unique requirements. In all cases, contributions are limited to employee deferrals and whichever employer contribution option is being used to comply with the SIMPLE rules. Let's look first at the SIMPLE IRA. Any employee who has received at least $5,000 in compensation from the employer during any two preceding calendar years (whether or not consecutive) and who is reasonably expected to receive at least $5,000 in compensation during the current calendar year must be eligible to participate. An employee must be given the right to enter into a salary reduction agreement or modify an existing salary reduction agreement during the 60-day period immediately preceding January 1 of a calendar year. Because that may not be practical for the year in which the plan is first established, the 60-day period for the first year would begin on the effective day of the plan. An employee must be given the right to terminate the salary reduction agreement at any time during the year and, if so, the employer may restrict re-entry until the next calendar year. The employer has the option of one of two contribution formats. The matching contribution requires a dollar-for-dollar match, up to 3% of an employee's compensation for the year. The Conference Committee Report on SBJPA indicates that the cap on compensation ($160,000 for 1997) does not apply for purposes of the 3% match. Applying this provision to the operation of a plan would allow a match of up to $6,000. An employer may reduce the match to as low as 1% in any two of the five years ending with the current year. In order to take advantage of this option, the employer must notify employees within a reasonable period of time prior to the 60-day election period during which employees can determine whether or not they will participate in the SIMPLE IRA. The IRS has indicated that if an employer adopts a SIMPLE IRA the employer can treat any year prior to the first year as a year in which the 3% limit was met. This interpretation means that the employer can establish a SIMPLE IRA and offer a 1% match for the first two years. If none of the employees elects to make deferrals, there is no employer contribution required if the matching option is chosen. It seems that, unlike a 401(k) plan, where it is in the best interest of the owner to encourage participation, it is not in the owner's best interest to encourage participation in a SIMPLE plan because that would only increase the employer's cost without any additional benefit to the owner. As an alternative, the employer may make a 2% non-elective contribution to all eligible employees who have earned at least $5,000 from the employer for the year. If this alternative is chosen, the employer must notify the employees within a reasonable period of time before the 60- day election period. For purposes of this alternative contribution, compensation to be taken into account is limited to $150,000 as indexed as per IRC §401(a)(17), ($160,000 for 1997). If the plan chose this option, the maximum employer contribution would be $3,200 (2% of $160,000). In all cases, whether using the matching contribution or the nonelective contribution, the employee is fully vested in the employer contribution. If a SIMPLE IRA is adopted, it must be the only plan of the employer to which contributions are made or benefits accrued. If, for example, the employer has an existing profit sharing plan, can that same employer adopt a SIMPLE IRA? The answer depends on the status of the profit-sharing plan. If no contributions are made to the profit-sharing plan, there is no conflict. In all cases, any existing plan must be reviewed closely to be sure benefits are not accruing. Distributions may be rolled over tax-free to another SIMPLE plan or to an IRA account after two years. The two-year period is measured from the date of the first contribution. Any distributions made during that two year period, other than to another SIMPLE plan, are subject to a 25% penalty tax. Distributions may not be rolled over to other qualified retirement plans. Although SIMPLE 401(k) plans are similar to SIMPLE IRAs, there are some differences. The employer contribution options are the same, i.e., a dollar-for-dollar match up to 3% of compensation or a 2% nonelective contribution. In both of these cases, however, the compensation cap of $160,000 for 1997 does apply. If the employer chooses the 3% match option, there is no flexibility to reduce that match as in the SIMPLE IRA. Regarding employee deferrals, although the limit of $6,000 is the same, SIMPLE 401(k)s also are subject to the IRC §415 limits, i.e., the lesser of 25% of compensation or $30,000. In application that means in a SIMPLE IRA a business owner can place his or her spouse on the payroll for $6,000 and effectively create a family deferral of of $12,000 plus the match but in a SIMPLE 401(k) would only have a family deferral of $7,500, if the owner had sufficient income. (See Table 4.) Unlike SIMPLE IRAs, an employer may sponsor another qualified plan for employees who are not covered by the SIMPLE 401(k). In addition, a SIMPLE 40l(k) plan may be sponsored by a not-for-profit organization but a SIMPLE IRA may not. SBJPA also provides that, beginning in 1997, 401(k) plans may be sponsored by not-for profit organization. This change is most welcome for not-for-profits that do not qualify under IRC §501(c)(3) as eligible sponsors of tax-sheltered annuity programs or IRC §403(b) plans. Distributions from SIMPLE 401(k) plans are treated the same as other qualified plans. Other than statutory exceptions, all distributions prior to age 591/2 are subject to a 10% penalty tax. One other administrative difference is the need to file form 5500 for SIMPLE 401(k)s but not SIMPLE IRAs. On the positive side, neither SIMPLE IRAs nor SIMPLE 401(k)s are required to satisfy the ADP or ACP tests or comply with the top-heavy rules under IRC §416 which require minimum contributions for rank-and-file employees. SBJPA goes a long way to simplify the operation of retirement plans, specifically 401(k) type plans, but not quite far enough. IRS Notice 97-6 expands on the notification and administrative requirements of both the employer and trustee for a SIMPLE IRA. Because SIMPLE 401(k)s are treated as being part of a 401(k) arrangement, they are still subject to the reporting requirements that a 401(k) plan would be subject to and are not covered in this notice.
How much do I need to retire? | 401(k) "SIMPLE"ification Save Taxes | 401 (k) Choices Self Employed Professionals | Business Owners | Employees 333 Earle Ovington Boulevard, Suite 1005 Uniondale, New York 11553-3654 Phone: (516) 228-8444 Fax: (516) 228-8457 E-mail: aps@apspension.com |
