April 22, 2021

SIMPLE 401(k) Plan

Your Guide

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

Retirement Dictionary Staff

Frequently Asked Questions Regarding

72(t) payments – also referred to as Substantially Equal Periodic Payments (SEPP) can be taken from IRAs, qualified plans-including 401(k) plans, and 403(b) accounts. However, while 72(t) payments can be taken from IRAs at any time, they can be taken from qualified plans and 403(b) accounts only after the participant has separated from service with the employer that sponsored the plan. Therefore, if you are still employed by the company that sponsored your 401(k) plan, you cannot take 72(t) payments from that account.  But, if you are no longer employed by that company, then you may be able to take 72(t) payments from the account.

Please contact our office to help you determine if a 72(t) payment program is suitable for you.

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