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April 22, 2021

SIMPLE 401(k) Plan

Your Guide

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Definition

A 401(k) plan  established by a small business owner 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

$13,000

$3,000

2021

$13,000

$3,000

  • 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

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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