Savings Incentive Match Plans for EmployeesSince 1997, firms that employ 100 or fewer workers and do not maintain any other retirement plan have had the option of establishing a savings incentive match plan for employees (SIMPLE).(1) In 2002, 8 percent of employees of small establishments with defined-contribution plans were covered by SIMPLEs. Like SEPs, SIMPLEs offer a trade-off between less burdensome qualification requirements and slightly less favorable tax treatment. Among the qualification requirements that need not be met are the nondiscrimination rules and the special rules for top-heavy plans. The limits on tax-deferred contributions to SIMPLEs are lower than those for qualified plans, however, and vesting requirements are stricter. A SIMPLE can be set up in the form of contributions to each employee's IRA or as a 401(k) plan. (If the SIMPLE is set up as a 401(k), vesting in the employer's contributions must be immediate.) Instead of complying with the nondiscrimination rules that apply to qualified plans, SIMPLEs must cover all qualified employees and must use one of two formulas to determine contributions. Under the first formula, the employer matches the employee's contributions dollar for dollar up to a total of 3 percent of compensation.(2) Under the second formula, the employer contributes 2 percent of compensation regardless of the employee's contribution. Some of the limits on contributions that apply to other defined-contribution plans, such as the limit on countable compensation and the limit on aggregate annual contributions, also apply to SIMPLEs. However, the limit on annual tax-deferred contributions by employees is lower than that for other defined-contribution plans.
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