SIMPLE Plan

 

(Savings Incentive Match Plan for Employees)

 

Beginning January 1, 1997, a new simple retirement plan can be established by an eligible employer. An eligible employer is one that has 100 or fewer employees who earned at least $5,000 in compensation from the employer during the preceding two years and is reasonably expected to receive at least $5,000 for the current year. A simple plan is set up in the form of an IRA.

 

A simple plan's features are that (1) it must be the exclusive plan of the employer: (2) all contributions are 100% vested; (3) the participants may elect to defer a percentage of compensation not to exceed $13,500 (2021 - Indexed); and (4) the employer must either match the participant deferral up to 3% of compensation, or make a 2% non-elective contribution for each eligible participant, regardless of whether or not they elect to defer any of their compensation.

 

If these conditions are met, the nondiscrimination tests generally applicable to qualified plans do not apply; specifically the Average Deferral Percentage (ADP) test, the Average Contribution Percentage (ACP) test, and the Top Heavy test.

 

If the employer elects to make contributions under the 3% matching contribution formula, the limitation on compensation ($290,000 for 2021) does not apply; therefore the employer can match an employee's contribution of up to 3% of compensation (unlimited) subject only to the maximum employer contribution limit of $13,500. However, if the employer elects to make contributions under the 2% non-elective contribution formula, the indexed limitation on compensation ($290,000 for 2021) does apply.

 

Disadvantages

Many part time employees must be covered.

Contributions are 100% immediately vested.

Little flexibility in plan design.