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March 12, 2023

SIMPLE 401(k) Plan

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SIMPLE 401(k) Plan

a 401(k) plan established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions are treated as ordinary income to the participant.

Definition

A SIMPLE 401(k) plan is a 401(k) plan established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions are treated as ordinary income to the participant.

The following types of contributions can be made to a SIMPLE 401(k)
  1. Salary deferral contributions by the participants from their compensation on a tax-deferred basis. This means that the contributions reduces the participant’s taxable compensation
  2. Employer contributions. Employers can make either
    1. A matching contribution of $1 for $1 up to 3% of the participant’s compensation. This matching contribution is made only to the SIMPLE 401(k) accounts of employees who make salary deferral contributions or
    2.  A 2% non-elective contribution to each eligible participant’s SIMPLE 401(k) accounts, whether or not the employee makes a salary deferral contribution

Employers are able to deduct employer-contributions to the SIMPLE 401(k) plan, providing the contributions are within statutory limits.

Earnings on contributions accrue on a tax-deferred basis.

An employer is eligible to establish A SIMPLE 401(k) plan only if it had no more than 100 employees who earned $5,000 or more in the preceding year. This is referred to as the 100-employee limitation

Referring Cite

IRC § 401(k), IRS Publication 560,Revenue Procedure 97-9

Additional Helpful Information

Individuals may make salary deferral contributions of up to 100% of their salary/wages up to the dollar limit that is in effect for the year to their SIMPLE 401(k) account . Individuals who reach age 50 by the end of the year may contribute additional amounts referred to as ‘Catch-up’ contributions.

The dollar limits as of 2011 are as follows:

Year SIMPLE 401(k)
Salary Deferral contribution limit Catch-up contribution limit
2011 $11,500 $2,500
2012 $11,500 $2,500
2013 $12,000 $2,500
2014 $12,000 $2,500
2015 $12,500 $3,000
2016 $12,500 $3,000
2017 $12,500 $3,000
2018 $12,500 $3,000
2019 $13,000 $3,000
2020 $13,500 $3,000
2021 $13,500 $3,000
2022 $14,000 $3,000
2023 $15,500 $3,500
  • Employers must provide employees with a Summary Description and a Notification to Eligible employees before the 60-day election period
  • Contributions to SIMPLE 401(k) plans are immediately 100% vested
  • The ADP, ACP and top-heavy tests do not apply to SIMPLE 401(k) plans
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