SIMPLE 401(k) plan - Combining features of SIMPLE IRA and traditional 401(k) Plan
The most important question about the SIMPLE 401(k) Plan that everyone likes to know is 'How does it differs from a SIMPLE IRA or traditional 401(k) Plan?' Actually, the SIMPLE 401(k) combines some features of both these other plans.
If you are a business owner then you must not have more than 100 employees and these workers should have earned at least $5,000 in the year before they sign up for the plan. You should not offer any other retirement plan to your employees either.
You also need to annually file a Form 5500.The IRS has issued Model Amendments for SIMPLE 401(k) plans. These Model Amendments permit a 401(k) plan to become a SIMPLE 401(k) plan (if the other requirements are met).
What are the contribution rules and limits?
Employers have to match the match employee contributions dollar-for-dollar, up to 3 per cent of the employee's salary. An employer must also make a flat 2 per cent compensation even if the employee does not make contributions to the SIMPLE 401(k). This is called a non-elective contribution. The contribution limits are as follows:
Employee - $11,500 in 2010 and 2011. If the employee is age 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is $2,500 in 2010 and 2011.
Employer - A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee.
How to set up a SIMPLE 401(k)?
You need a written plan which should be the prototype of an IRS document or one designed by yourself or your tax consultant. All financial institutions could help you set up such a plan. You have to invest the assets of the plan in a custodial account or a trust with the help of a legal instrument. You would require legal help for this. You must issue a notification for your employees once the plan is established. Guidelines are similar to the SIMPLE IRA. Contributions are also as deductions from the employees’ salary deductions with matching or non-elective contributions by you the employer. The regulations are same for the SIMPLE IRA plan if you want to set up the plan for yourself as an individual who is self-employed.
Are loans allowed on a SIMPLE 401(k) Plan?
One of the most attractive features of this Plan is that employees and business owners are allowed to take loans. In-service withdrawals are allowed with a 10 per cent penalty if you are under the age of 59 years and six months. There are some exceptions to this rule though.
What is the last date to set up a SIMPLE 401(k)?
You could set up the SIMPLE 401(k) between January 1 and October 1. But if you set up your business after October 1 then you are allowed to set up the Plan as soon as it becomes feasible for you to administer it after having taken care of all the other issues relating to setting up the business.