What is a SIMPLE Plan and what are its advantages?
A "SIMPLE" plan is a type of simplified retirement plan for small businesses. Because of its streamlined
features, it is not subject to the complex qualification requirements associated with tax-qualified
retirement plans. Administrative and legal costs therefore are minimized.
Other key advantages of SIMPLE plans from an employer's standpoint are that they are subject to
simplified reporting requirements and that the employer will not be subject to fiduciary liability resulting
from the employee or the employee's beneficiary exercising control over the assets in his or her
Who can adopt a Simple plan?
Your business is eligible to adopt a SIMPLE plan if it employs 100 or fewer employees who earned at
least $5,000 in compensation for the preceding year and it does not maintain another
employer-sponsored retirement plan. If your business is eligible to establish a SIMPLE plan but later
becomes ineligible, your company will have a two-year grace period during which it may continue to
maintain the plan.
How do SIMPLE plans work?
A SIMPLE plan allows employees to make elective contributions to an individual retirement account
(IRA). Employee contributions must be based on a percentage of their compensation and cannot
exceed a certain amount per year ($7,000 for 2002). As an employer, your business would have to
satisfy one of two contribution formulas:
(1)Under the matching contribution formula, your company generally would be required to match
employee contributions dollar-for-dollar up to 3% of each participating employee's compensation. A
special rule allows you to elect a lower percentage matching contribution for all employees (but not less
than 1% of each employee's compensation). You cannot, however, elect to use such a lower
percentage for more than two out of any five years.
(2)Instead of making matching contributions, your company could elect to make a 2% contribution on
behalf of each eligible employee who earns at least $5,000 in compensati