SIMPLE 401(k) Plans

An employer (other than a governmental employer) that does not employ more than 100 employees who received at least $5,000 of compensation from the employer in the preceding year, nor maintain another qualified retirement plan in which the same employees (who received at least $5,000 of compensation from the employer in the preceding year) are covered, may adopt a SIMPLE plan as part of a 401(k) cash-or-deferred arrangement. With a few exceptions discussed following, the rules for SIMPLE 401(k) plans follow those for regular 401(k) plans (e.g., eligibility rules, coverage rules, and the Section 415 contribution limits).

SIMPLE 401(k) plans do not have to meet the usual 401(k) nondiscrimination tests with respect to elective deferrals (the average deferral percentage test) or employer matches (the actual contribution percentage test), provided-

• no employee's elective salary deferrals exceed the lesser of (a) the maximum deferral limit or (b) 100% of compensation less FICA withholding;
• the employer either makes contributions that match the employee's elective salary deferrals for the year, up to 3% of the employee's compensation (up to $230,000 for 2008), or makes a nonelective contribution of 2% of compensation (up to $230,000 for 2008) for each eligible employee who earned at least $5,000 in compensation for the year, and notifies employees of the election within a reasonable period before the 60-day election period;
• no other contributions are made under the arrangement; and
• all contributions to the SIMPLE 401(k) plan are 100% vested.

The annual elective deferral limit for SIMPLE 401(k) plans, and additional "catch-up" contributions permitted for participants age 50 and over, phase-in in accordance with the following table:

*After 2008, the basic elective deferral limit for SIMPLE 401(k) plans is indexed to inflation. The age-50+ catch-up amount is indexed after 2008.

Technically, a plan may not permit additional catch-up contributions (elective deferrals) by persons age 50 and over for a particular year that are greater than the lesser of—

• the maximum incremental dollar amount allowable (i.e., $2,500 for 2008), or
• the excess of the individual's compensation for the year over other elective deferrals made for the year, ignoring the additional catch-up amount.

In a SIMPLE 401(k) plan, the employer cannot use the option to reduce the contribution to less than 3% in up to two out of five years as is possible with a SIMPLE IRA plan.

If these requirements for SIMPLE 401(k) plans are met, the plan will avoid having to meet the top-heavy rules as well as the regular 401(k) and (m) nondiscrimination rules.

The employer's deduction for SIMPLE 401(k) plan contributions is the greater of (1) 25% of the compensation paid to plan participants for the year, and (2) the amount the employer is required to contribute to the plan for the year.