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Deadline looms for SIMPLE, Safe Harbor plans

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While Congress considers possible changes to retirement law, plan advisors may want to remind their prospects of existing legislation tailored to the needs of small employers. 

Specifically, employers meeting certain requirements have until Oct. 1 to set up SIMPLE IRA, SIMPLE 401(k) or Safe Harbor 401(k) plans. 

SIMPLE IRA plans (Savings Incentive Match Plan for Employees of Small Employers) are available to businesses with 100 or fewer employees. 

They’re designed to make establishing a plan simple and cheaper than a traditional 401(k) plan, and they also relieve sponsors from having to file an annual Form 5500 — a commonly reported deterrent to implementing a plan in a small business. 

Employers also have some flexibility when it comes to how they contribute to their employees’ plans. 

Each year, a sponsor of a SIMPLE IRA can either make a 2 percent non-elective match to each qualifying employee, regardless of whether employees contribute themselves, or they can match employees’ contributions up to 3 percent of their salaries. 

The choice gives small employers flexibility in budgeting how they contribute to the plan. However, in order to qualify for the tax benefits under a SIMPLE IRA, which include a $500 deduction for the first three years of the plan to defray start-up costs, a sponsor must make either the non-elective 2 percent match or the elective match of up to 3 percent. 

SIMPLE 401(k) plans, which are similarly structured, are also available to sponsors with 100 or fewer employees, and have the similar employer contribution option of up to 3 percent of an employee’s salary when they elect to contribute, or a 2 percent non-elective contribution from the employer. One or the other forms of contribution must be made to qualify as a SIMPLE 401(k) plan, which do not have to undergo annual non-discrimination tests. But they are required to file an annual Form 5500. 

Safe Harbor 401(k) plans for businesses with 100 or fewer employees are structured to benefit those small businesses, and their owners, who want a more aggressive savings model. 

Employees in a Safe Harbor plan can contribute up to $17,500 annually, as opposed to a $12,000 limit for SIMPLE IRA plans. Also, the “catch up” allowance for employees older than 50 is greater — up to $5,000. 

But, because the allowable contributions are greater, so is the sponsor’s matching obligation under a Safe Harbor plan. 

Sponsors must match a minimum of 3 percent of their employees’ contributions, plus a 50 percent match on the next 2 percent that an employee defers. 

So when an employee contributes 5 percent of their salary, a sponsor would have to match at least 4 percent to maintain Safe Harbor status. 

The non-elective match is also greater: Safe Harbor plans are required to make a 3 percent contribution to those employee accounts that don’t make their own contribution, as opposed to the 2 percent requirement under SIMPLE IRA plans. 

Paul Davidson, director of product management a Paychex, the Rochester, N.Y.-based payroll and retirement plan provider, says that when it comes to understanding which option is best for an employer, the key is that they know all of the options available. 

“Traditional 401(k) plans give sponsors greater flexibility — though they do cost more to administer. We find that the majority of small and midsized sponsors are willing to pay the extra costs for the flexibility,” said Davidson. 

He calls Safe Harbor plans “a streamed down” 401(k). With them, sponsors can set an aggressive contribution design, while shedding administration costs and headaches. 

“Going the Safe Harbor route can save a sponsor up to 60 percent of the administration costs they would pay in a standard 401(k) plan,” explained Davidson. 

Professional services firms — such as smaller medical groups or law firms — that have higher earners on their payroll can be attracted to Safe Harbor over SIMPLE plans because of their higher contribution caps. 

And small business owners that want the ability to contribute more of their own salary, pre-tax, could also find value in a Safe Harbor plan. 

But not if they don’t meet the Oct. 1 deadline, said Davidson.