HOUSTON BUSINESS REVIEW

THE CPA CORNER: SMALL BUSINESS SIMPLE 401(K) PLAN
By C. Kevin Moore

Kevin Moore is a Principal of C. Kevin Moore & Associates and has two decades of experience as a Certified Public Accountant. Each week he provides the information you need to grow and protect your business.

Just like the SIMPLE-IRA, this is a plan just for you: the small business owner with 100 or fewer employees. However, just as with the SIMPLE-IRA, there is a two-year grace period for growing businesses.

Under a SIMPLE 401(k) Plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you, the employer, must make either:

• A matching contribution up to 3% of each employee’s pay; or
• A non-elective contribution of 2% of each eligible employee’s pay.

No other contributions can be made. The employees are totally vested in any and all contributions. If you establish a SIMPLE 401(k) Plan, you:

• Must have 100 or fewer employers;
• Cannot have any other retirement plans; and
• Need to annually file a Form 5500.

The IRS has issued Model Amendments for SIMPLE 401(k) Plans. These Model Amendments permit a 401(k) plan to become a SIMPLE 401(k) Plan (if the other requirements are met).

Pros and Cons:

• Plan is not subject to the discrimination rules that everyday 401(k) plans are.
• Employees are fully vested in all contributions.
• Straightforward benefit formula allows for easy administration.
• Optional participant loans and hardship withdrawals add flexibility for employees.
• No other retirement plans can be maintained.
• Withdrawal and loan flexibility adds administrative burden for the employer.

Who Contributes:

Employee salary deferrals and Employer contributions.

Contribution Limits:

Employee - $8,000 in 2003 with annual increases in $1,000 increments until the limit is $10,000 in 2005. If the employee is aged 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is: 2003 - $1,000 ; 2004 - $1,500 ; 2005 - $2,000 ; and 2006 - $2,500.

Employer - A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee.

Filing Requirements:

Annual filing of Form 5500 is required.

Participant Loans:

Permitted.

In-Service Withdrawals:

Yes, but subject to possible 10% penalty if under age 59-1/2.

Retirement plans do not have to be complicated or only for big business. Give this idea some thought.