Simple 401k

There tends to be a lot said about SIMPLE IRAs, profit-sharing plans and the SBO-401(k). But not much attention is given to the SIMPLE 401(k) plan. When it is mentioned, the question usually is why would one choose a SIMPLE 401(k) instead of a SIMPLE IRA or regular 401(k) plan?

The fact is the SIMPLE 401(k) plan is a cross between a SIMPLE IRA and traditional 401(k) plan and offers some features of both plans .

Here we review some of the features and benefits of the SIMPLE 401(k) plan and compare it to the traditional 401(k) plan.

Advantages
  1. No Testing - An employer that adopts a traditional 401(k) plan may be required to perform certain non-discrimination and top-heavy testing to ensure that the plan operates in compliance with regulatory requirements. Generally, such testing must be done by professionals who specialize in that area and can be quite costly. SIMPLE 401(k) plans, on the other hand, do not require these tests. This can be very appealing to a small business owner who likes the features of the 401(k), but can't afford the administration costs of testing.

  2. Loans Allowed -Loans can be an attractive feature of a qualified plan because employees and business owners usually like the idea of being able to borrow their own funds and make loan and interest payments to their own accounts. The loan feature can be made available in both SIMPLE and traditional 401(k) plans.
Disadvantages
  1. Immediate Vesting of Contributions - With a traditional 401(k), employer contributions can be subject to a vesting schedule, and this may help to reduce high employee turnover. But contributions to a SIMPLE 401(k) are immediately 100% vested, which means that an employee who meets the requirements to receive distributions from the plan may withdraw his/her entire account balance at any time.

  2. Contribution Limits are Lower - Contribution limits for a SIMPLE 401(k) plan are lower than the limits for the traditional 401(k) plan. The salary deferral limits of both plans for 2011 are $11,500 and $16,500 respectively.

Furthermore, employer contributions to an employee's SIMPLE 401(k) account are limited to 3% of the employee's compensation, while for the traditional 401(k), the employer may contribute up to 25% of the employee's compensation.

Also, the compensation limit applies to both plans, which means the employer cannot consider compensation in excess of $245,000 for 2011 (indexed) for plan purposes.

Therefore, an employee's total contribution to a SIMPLE 401(k) plan for 2011 can be as much as $18,850 (salary deferral of $11,500 + 3% contribution of maximum salary of $245,000) plus catch-up contributions, while contributions to a traditional 401(k) plan can be as much as $49,000 plus catch-up contributions.

If you think the SIMPLE 401(k) might be suitable for your business, be sure to consider the pros and cons.

If you are considering Retirement planning , call for a Free Consultation today.
 

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