401k-Simple

This plan is a fairly new concept to the retirement plan landscape. Just like the Simple IRA plan, Simple 401k’s are plans designed for the small business owner with 100 or fewer employees.  And, just as with the Simple IRA plan, there is a two-year grace period for budding businesses, if the business goes over the 100-employee limit.

Under Simple 401k's, employees can elect to defer some of their compensation.  But unlike a standard 401k plan, you the employer must make either:

1.    A matching contribution up to 3% of each employee’s pay, or
2.    A non-elective contribution of 2% of each eligible employee’s pay.

No other contributions can be made.  The employees are totally vested in all contributions, including those made by the employer to the employee’s account.

If you establish a 401k-Simple, you:

• Must have 100 or fewer employers.
• Cannot have any other retirement plans.
• Need to file a Form 5500 annually.

The IRS has issued model amendments for Simple 401k's.  These model amendments allow a 401k plan to turn into a Simple 401k plan (if the other requirements are met).

Pros and Cons

• Plan is not subject to the discrimination rules that traditional 401k plans are.
• Employees are fully vested in all contributions, including those made by employers to employee’s accounts.
• Straightforward benefit method allows for simple administration.
• Optional participant loans and hardship distributions add flexibility for employees.  Simple IRA's are not eligible for loans.
• Like a Simple IRA, no other retirement plans can be maintained.
• Withdrawal and loan flexibility may add administrative burden for employers.

Contribution Limits

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.

Filing Requirements:  Annual filing of Form 5500 is required.

Participant Loans:  Simple 401k's DO allow for loans.

In-Service Withdrawals:  Yes, but subject to possible 10% penalty if under age 59-1/2.

 

Hire 401kFundAdvice to be your Simple 401k Investment Advisor.