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)
- 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
- Employer contributions. Employers can make either
- 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
- 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
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:
Salary Deferral contribution limit
Catch-up contribution limit
- 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