If you have questions about the information below or would like to schedule a S.M.J.B. seminar for your group, please contact Tom Carson Jones.

 
Outline of the SIMPLE Pension Plan
by Tom Carson Jones, CPA
     updated May 2005

Who Can Participate?
1.  Employers with up to 100 eligible employees (see eligible employees defined below) can participate.  If an employer goes over 100, he may have SIMPLE for 2 more years.
2.  Conference committee says "under common control" applies.
3.  Self-employed are OK, and S Corporations are OK.
4.  Eligible employees are those who received at least $5,000 in compensation from their employer in either of the past two years AND are reasonably expected to receive $5,000 during the year; thus, PART-TIME EMPLOYEES ARE EXCLUDED!  It appears that new employees are excluded (because they did not earn $5,000 last year). 
5.  No SIMPLE if you have other plans (in future, you may be able to convert existing plans to SIMPLE).
6.  No minimum percentage of participation is required.  The plan must be offered to all, but if the owner is the only participant, that is OK!

Employee's Cost and Information
1.  Each employee may put up to $10,000 a year (see item 3) in the SIMPLE plan; the deduction is to be stated as a percentage of pay.    

2. Employees (including owners) age 50 or older will be permitted to make an additional $1,000 contribution per year in 2005, $2,500 in 2006 and beyond. This has increased from $500 in 2002 when first allowed.
3.  Maximum amount of employee contribution was increased in the 2001 Tax Act. For 2002, the maximum amount is $8,000 ($9,000 in 2004) with a $1,000 increase per year up to $10,000 in 2005. The limit is indexed for inflation after that point.
4.  IRA 10% early withdrawal rules apply PLUS a 25% penalty for early withdrawal from SIMPLE within two years of plan participation.
5.  Employee's contributions are subject to payroll taxes but are not included in income tax wages; employer's contributions are not subject to payroll taxes.
6.  Can not commingle this with your IRA account within two years of contribution due to the potential 25% penalty.  You could after that point though.

Employer's Cost and Information
1.  One of two options is available:
          a.  Employer is required to match, dollar for dollar, up to 3% of employee's
               compensation.  Contributions are required only for those employees that
               put some in themselves (see related information at item 2).  In most
               businesses, because few employees participate, this option will be best.
          b.  Employer pays in 2% for all eligible (full-time) employees, regardless of
               whether they contribute.
2.  Employer may put in less than 3% in two of five years but must put in at least 1% and must announce the percentage before the year starts.  Some contribution is mandatory.
3.  Employer's matching contributions don't need to be paid until the due date of the return.
4.  All contributions are immediately vested.
5.  The trustee (broker, bank, insurer) will charge a fee, which could be passed through to the employee. A fee of $40/year per account is common.

For the "Highly Compensated" Owner
1.  If you choose option b (2% for all), your maximum eligible pay is $210,000--thus, $10,000 from you and $4,100 from business.  However, if you choose the matching option, $10,000 from you and $10,000 matched by business if pay is $333,333 or more (total SIMPLE deferral of $20,000).
2.  No top heavy rules exist.  Neither do family aggregation rules . . . both husband and wife (and children) may participate.
 
Paperwork
1.  Each month the employer will send a check to the trustee for the previous month's withholdings.  This would need to list each employee and the amount.  Payment must be made by the end of the following month (January withholdings by February 28).  Employer's match may wait until the due date of his return, including extensions.
2.  Employer pays employee withholding and employer contribution/match to SIMPLE trustee.  The employee may choose to have funds transferred to another administrator.
3.  The trustee does all IRS reporting.
4.  Employer must notify employees of their rights under the plan; the trustee is to provide this information to the employer.
5.  The trustee must give participants account statements within 30 days of year end.
6.  SIMPLE account must be started before October 1 to use in the current year. This is a frequent deterrent...many business owners don't consider a pension plan until late in the year.
 
7.  We would suggest that employers have a signed note in applicable employee files that they offered the SIMPLE, but the employee declined.
 
IRA vs. 401k
1.  SIMPLE plan must be a SIMPLE IRA or a SIMPLE 401k.  Literature seems to feel that SIMPLE IRA will be most common.
2.  SIMPLE 401k may allow employees to borrow from the plan under certain conditions.
          a.  That feature may increase the cost of plan administration.
          b.  Borrowing from 401k is used by nearly one fourth of participants, but most
               financial advisors strongly recommend against it.

SIMPLE vs. SEP or 401K
Although there are other types of plans where the owner of a small business can defer more money, the SIMPLE works well when you don't want to pay a ton of money in for other employees, especially if they don't recognize the value of this fringe benefit. For example, a business has the owner who makes $150,000 and three employees making $30,000 each. In the SIMPLE, the owner puts in $10,000 of his/her own money, plus a match of (about) $4500. The most the owner would have to pay for employee match would be $2,700 (3% x $90,000). It's possible that there would be no cost if the employees chose not to participate. Although this owner could put $25,000 (or more) in some other types of retirement plans, the employee portion could cost $13,500 (if the percentage was 15%).

PLANNING OPPORTUNITIES
In the first year of your plan, start just before the October 1 deadline. Although the maximum 3% match is based on the salary for the whole year, the employee contribution likely would not be that much for 3-4 months. The owner would put in as much as possible also giving the maximum match.
An owner's spouse could get a gross paycheck of (say) $11,000. After social security and medicare are deducted, put the $10,000 maximum in the SIMPLE. This does cost social security medicare and unemployment taxes (and possibly workers comp insurance)...make sure you weigh the costs and the benefits.
Owners should set their deferral percentage as high as 100% to get their money deferred as soon as possible.