The Small Business Job Protection Act of 1996 makes available a new type of retirement plan for employers with no more than 100 employees. This type of plan is referred to as the SIMPLE plan (for Savings Incentive Match Plans for Employees of Small Employers). The purpose of the SIMPLE plan is to allow employers an easier way to establish and maintain a retirement plan for their employees.
To implement this, an employer must meet two basic requirements to have a SIMPLE plan. First, the employer must have no more than 100 employees (counting only employees with at least $5,000 of annual compensation). If an employer has adopted a SIMPLE plan and then grows to more than 100 employees, it's given a 2-year grace period to operate the SIMPLE plan and then must convert to another type of qualified retirement plan. The second is that the employer should have no other qualified retirement plan. For example, an employer with a defined benefit pension plan cannot establish a SIMPLE plan. However, as we shall see an employer that currently sponsors a 401(k) plan and has no other plan can easily modify their 401(k) plan to meet the rules for SIMPLE plans.
There are two routes for setting up a SIMPLE plan:
1. An employer can either use IRA's for holding the retirement accounts of each participant or
2. can set up a trust or insurance contract and operate the plan as a kind of 401(k) plan.
Some of the rules for SIMPLE plans are the same for the IRA and 401(k) variations but other rules are significantly different. Understanding these differences is a key to deciding which arrangement will work better for a specific employer.
Basic Features
SIMPLE plans have a specified employer contribution and immediate vesting. The employer contribution required to a SIMPLE plan is a 100% match of the first 3% of pay an eligible employee elects to contribute to their retirement account.
Employees are allowed to contribute to the plan on a pretax basis as much as $6,000 per year.
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