There are a variety of retirement plans available to small business owners and their employees and each one offers unique benefits and drawbacks.
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We’ve discussed SEP- IRA and SIMPLE IRA plans in previous articles and what owners need to know about them, and if you find that neither of those plans suit your needs, you may consider the SIMPLE 401(k) plan.
The main difference between a SIMPLE IRA plan and a SIMPLE 401(k) plan is that that there is more paperwork with a SIMPLE 401(k). With these plans, you need to file a Form 5500 every year making them more costly to administer. And to be eligible, your business must have fewer than 100 employees.
So why would someone want a SIMPLE 401(k) over a SIMPLE-IRA? The SIMPLE 401(k) allows for larger contributions; for 2013, the maximum contribution is $12,000. If a plan participant is 50 or older,he or she may make catch up contributions up to $2,500. The employer may make matching contributions up to 3% of compensation for the year, or nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from your company for the year.
When you adopt a SIMPLE 401(k) plan, you must notify employees before the beginning of the election period that they have the opportunity to make or change a salary reduction choice under the plan. You also have to let them know whether or not you will make matching contributions or nonelective contributions.
Be sure to provide a summary description of the plan from the financial institution. You must also let employees know in writing that that their balance can be transferred without cost or penalty if they use a designated financial institution.
Failure to follow the rules and procedures for these plans can lead to hefty penalties. “Of all the different types of retirement plans, 401(k)s are the most non-compliant,” says Brett Goldstein, director of retirement planning at American Investment Planners in Jericho, N.Y. “Small businesses tend to have many 401(k) compliance issues.
One of the main reasons is that smaller companies tend to hire inexperienced financial advisors, who are not familiar with the rules and regulations. Unfortunately, a mistake with a SIMPLE 401(k) can cost a small business owner thousands of dollars in penalties. For example, not filing a Form 5500 with the Department of Labor can result in a $1,100 per day penalty with no maximum for failure to file.
Goldstein further states that, “Employers are required to file Form 5500 for all 401(k)s (except those with no employees and under $250,000 in assets). The IRS also has the right to fine you $25 per day up to $15,000 for not filing Form 5500.
According to Goldstein, the Department of Labor collected $1.2 billion in fines and penalties in 2012. So it's important to make sure that your business is in compliance. “There are steps that people can take to minimize these penalties. But you need to act before you get a notice from the IRS or the DOL. Most people don't act until it’s too late.”
SIMPLE 401(k)s are similar to regular 401(k) plans except there is less administration and fewer fees.
In 2003 the IRS realized that many SIMPLE 401(k) plans were not in compliance. They therefore expanded the amnesty program so that companies that sponsor SIMPLES can correct their mistakes in order to receive a reduced penalty.
These are a listing of the highlights of the SIMPLE 401(k) plan. There are plenty of rules and regulations to which you must comply. Check with your plan administrator and tax professional.
For more information about SIMPLE 401(k) plans see IRS Publication 560.