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The SIMPLE plan - does it live up to its name?

MBJ Extra!

The Savings Incentive Match Plan for Employees (SIMPLE) was created to make it easier for small businesses to sponsor retirement plans for their employees. And, although it was not available to employees until 1997, it has already created havoc in the small business arena, earning praise for the attempt to reduce administrative expenses, and criticism for the required contributions and stringent limitations on employee contributions.

Just what is the SIMPLE IRA plan? Enacted under the guise of the Small Business Job Protection Act, the SIMPLE IRA is available to employers with 100 or fewer employees who earned at least $5,000 in the prior year and who don`t maintain another employer-sponsored retirement plan. Employees may contribute up to $6,000 of their salary on a pre-tax basis, while the employer is required to make a matching contribution on a dollar-for-dollar basis of up to 3% of the employee`s compensation. The employer can, however, in lieu of making the matching contribution, make a 2% profit-sharing type of contribution to all eligible employees, but no other contributions are permitted. The employer may elect to apply a lower percentage match (not less than 1% of the employee`s salary) for any year, upon reasonable notice to the employees, as long as the election will not result in the percentage being less than 3% of the employee`s salary in more than two out of five years. If the employer follows these requirements, administrative requirements and expenses should be substantially less of a hardship.

The strongest objections to the SIMPLE IRA plan are the deferral contribution limitations and the employer funding requirements. While there is no percentage limitation on the salary deferral side, the $6,000 cap represents a significant cut to those higher paid employees who could defer up to $10,000 in a 401(k) plan. Lower paid employees benefit under SIMPLE because they could conceivably contribute 100% of salary, up to $6,000. Additionally, the maximum total amount which any employee could receive under SIMPLE is $12,000


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