Simple 401(k)s are Anything but Simple

SIMPLE-401ksIn response to the growing demand by small businesses to be able to compete with larger companies, Congress, through the Small Business Job Protection Act of 1996, created a retirement plan call SIMPLE which stands for Savings Incentive Match Plan for Employees.  While it affords small businesses the opportunity to offer an employer-sponsored retirement plan similar to the 401(k) plans offered by larger companies, it’s not as simple as the name implies.  Many small businesses that adopt the plan find themselves struggling with plan implementation and obtaining sufficient employee participation to make it worthwhile.

How a SIMPLE 401(k) Works

Working through a third party administrator, any small business with 100 or fewer employees can have a SIMPLE 401(k) established quickly.  All employees aged 21 an older with 1 year of service are eligible to participate and may contribute up to $11,500 (2011 limit) per year or 100% of earnings, whichever is less.  For those over 50 years of age, there is an additional catch-up deferral contribution allowed as well. Contributions are deducted from the employees’ salary and then deposited within the plan. Employees are vested in all contributions immediately and employers may make either a matching, tax deductible contribution of up to 3% of the participants’ contribution or a non-elective contribution of 2% of employees’ pay.

How is it Managed?

You outsource this to a company which provides investment options, administration services and plan documents. These is usually an investment or insurance company. The investment accounts within the 401(k) plan are provided by professional investment managers, typically a family of mutual funds.  There are usually several different types of stock and bond accounts that enable the participant to select a mix of investments that best meets their criteria for risk.

The employer must comply with all of the ERISA filing and disclosures rules that apply to regular 401(k) plans. Also, the same annual filing of plan participant records, Form 5500, Summary Plan Description and Summary Annual Report is required.  These are generally prepared by the third party administrator for a fee.

Why Consider a SIMPLE 401(k)?

Smaller companies on a growth path have to be able to attract and retain excellent employees.  The high employee turnover that plagues many companies is very costly and impedes growth. It is especially important that a small business be able to provide its more highly paid employees with a competitive plan that allows them to maximize their contributions.

A SIMPLE 401(k) plan is a very attractive employee benefit and it puts the small business on par with retirement plans offered by larger companies.  It’s a very easy plan for employees to understand and there is no requirement for minimum participation.

Can a SIMPLE 401(k) be a Simple Solution for You?

On its face, a SIMPLE 401(k) plan is easy to establish and its requirements are fairly clear. But although the plan has been tailored to fit small businesses, the reporting and disclosure requirements of the SIMPLE 401(k) are the same as those required in a regular 401(k) plan resulting in disproportionately higher administration fees for small businesses.

The issue for a small business is whether it has the capacity to effectively communicate the plan, its benefits and its ultimate value to the employees. In order to optimize the plan for all employees and obtain maximum leverage of the administration costs, the employer needs to garner as much participation as possible.  An effective, ongoing communication and education plan that espouses the virtues of the SIMPLE 401(k) plan can achieve positive plan enrollment results.

If a business finds that the overall level of employee contributions is insufficient to be able to allow the more highly paid employees to contribute enough funds to make it a worthwhile benefit for them, it puts pressure on the employer to increase its contributions.

When making this decision, it’s important to project the annual costs of administration and also of the required contributions over time to assess whether or not this is a good employee benefits strategy for your business. Helping employees with retirement savings can be a good business tool. It just pays to be clear about the business outcome (lower staff turnover, easier recruitment, etc.) you are hoping for before adding this to your benefits plan.

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