Why Should a Small Employer Consider a SIMPLE 401(k)

SIMPLE 401(k)s are designed to be cheaper for employers to sponsor than traditional 401(k)s because employers aren’t required to satisfy complex nondiscrimination rules that apply to traditional 401(k) plans.

SIMPLE 401(k) plans have been available to employers since 1997. They were created under the Small Business Job Protection Act. The IRS considered the creation of SIMPLE plans to be the most important provision of the Small Business Job Protection Act.

Can any employer set up a SIMPLE 401(k) plan?
No. Congress designed the SIMPLE 401(k) to address the needs of small employers. Only employers that employ 100 or fewer employees who earned at least $5,000 in compensation during the prior year and that do not maintain other qualified plans may adopt SIMPLE 401(k) plans.

What does “SIMPLE” stand for?
The acronym “SIMPLE” stands for Savings Incentive Match Plan for Employees.

How much can employees contribute to a SIMPLE 401(k)?
The maximum salary reduction contribution is $6,000. Note that this dollar maximum is less than the dollar limit on salary deferrals under traditional 401(k) plans, which is $10,000 in 1999. In addition to the dollar limit on salary reduction contributions, a separate limit applies to all contributions to an employee’s account in a SIMPLE 401(k), as in a regular 401(k) plan. The limit in 1999 is the lesser of 25 percent of an employee’s compensation, or $30,000.

Are employer matching contributions discretionary?
No. An employer under a SIMPLE 401(k) plan is generally required to match employee deferrals on a dollar-for-dollar basis, up to a limit of 3 percent of the employee’s compensation for the entire calendar year.

Can employers design the SIMPLE 401(k) to defer vesting?
No. In a SIMPLE 401(k) plan, all contributions, including both employer and employee contributions, are fully vested and nonforfeitable when made.

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