A SIMPLE is basically a 401(k) for small businesses with
much simpler documentation requirements.
One reason they have become popular is that the employer must make a
contribution on behalf of those employees who choose to participate. Experience has shown that not all employees
choose to participate, and thus the amount the employer has to contribute for
non-owners is often much less than what is required under other retirement plan
options.
Eligibility: An
employer can set up a SIMPLE only if the business has 100 or fewer
employees. Any employee who was paid at
least $5,000 for any two previous years at your company and expects to receive
at least that amount in the current year is eligible to participate.
Contribution limit: For 2013, participating employees may elect to
contribute up to $12,000 to the plan. If
you are 50 or older, this amount increases to $14,500. Generally, employers must provide matching
elective contributions of up to 3 percent of compensation (but no less than 1
percent in no more than two out of five years) or a non-elective contribution
of 2 percent of each eligible employee’s compensation. The matching contributions are deductible by
the business.
Vesting rules:
Contributions to SIMPLEs vest immediately. This means that the employee owns the money
contributed by them and the company as soon as it is contributed, and can be
moved to their own IRA when they leave the company.
Distributions: The RMD (Required Minimum Distribution) rules
also apply to SIMPLEs. Note that the
usual 10 percent penalty tax for pre-age 59.5 distributions increases to 25
percent in the first two years of participation. Be sure to make this clear to all
participating employees.
Due date: A SIMPLE
can be set up at any time before October 1st. Unlike a SEP, however, the plan cannot be
established after the close of the tax year.
Be sure to check with your tax advisor before you set up a
SIMPLE to make sure this is the best retirement plan choice for you.