SIMPLE Plans as Benefits

Employers with no more than 100 employees may set up a savings incentive match plan for employee (SIMPLE). In effect, SIMPLE plans trade off lower annual contribution limits for ease of administration. Thus, they're generally cheaper and easier to operate than other retirement options, but you can't save as much for retirement each year as you can with the other options.

Here are the basic rules:

• A SIMPLE must be the only retirement plan you offer.
• The funding mechanism can be either an IRA or a 401(k) plan.
• For SIMPLE 401(k)s, the employee may contribute up to $12,000 annually in 2013 ($11,500 for 2012; this amount may be indexed for inflation). Those who are age 50 or over can make catch-up contributions of $2,500 for the year.
• The employer must either match each participating employee's contribution up to three percent of the employee's pay or make an across-the-board two percent contribution for all eligible employees with at least $5,000 in annual compensation, regardless of whether they participate in the plan. In the IRA form, employers can elect to limit the match to a minimum of one percent of all eligible employees' compensation, but this election can only be made in two out of every five years. These are the only permitted contributions.
• Employees vest immediately in all contributions made to their account, by themselves or the employer.
• In the IRA form, only employees that received at least $5,000 in annual compensation in the preceding two years and who are reasonably expected to receive this amount of compensation in the current calendar year are eligible to participate. In the 401(k) form, eligible employees are those who received at least $5,000 in compensation during the preceding year and who are reasonably expected to receive this amount of compensation during the year in question.
• In the IRA form, your plan is exempt from all nondiscrimination and top-heavy rules. In the 401(k) form, it is exempt from the special nondiscrimination rules and from the top-heavy rules, but it still must meet regular nondiscrimination and coverage rules.
• Employers may take a deduction for contributions to the employees' accounts.
• There are no reporting requirements imposed on the employer except for a single report to the government when the plan is created (employers do have to notify employees as to account balances, investment performance, etc.).
• A distribution to an employee during the first two years after the plan is created is subject to a 25 percent excise tax. After two years, distributions to anyone under age 59 1/2 are subject to a 10 percent excise tax.
• Upon separation from employment, distributions may be rolled over tax free to an IRA or to another SIMPLE plan. Distributions from the IRA form of SIMPLE accounts that an employee has participated in for at least two years can be rolled over into other types of retirement plans, such as employer qualified plans and deferred compensation plans of exempt employers, organizations and public schools.

One of the more interesting aspects of SIMPLE plans is that, although you must offer the plan to all eligible employees, you can still set up the plan even if none of your employees wants to participate. That is not true of other plans. Of course, there are strict rules and heavy fines for business owners who don't properly give employees the option of joining.

If you're interested in setting up a SIMPLE plan, contact anyone who might offer IRAs or 401(k) plans, such as banks, insurance companies, or investment houses.