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New federal retirement plans boost small companies’ benefits muscle

Heralded by financial planners and CPAs in Rochester as a way to reduce costly and time-consuming paperwork, the SIMPLE plan (or Savings Incentive Match Plan for Employees) consists of an IRA or 401(k) plan with the following features:
–Employers can match employee deferrals dollar-for-dollar up to 3 percent of compensation or choose, for any year, to make a 2 percent compensation contribution for each eligible employee.
–An employee is eligible if he or she has received $5,000 per year in compensation the two years prior to SIMPLE formation and is expected to receive that amount during the current year. Self-employed individuals also may contribute under the SIMPLE plan.
–The IRA option has a provision that would provide employers with the option to contribute as little as 1 percent in two out of five years. Says Susan Bayles, a pension consultant at Northeast Benefit Services Inc.: “I believe that the grace period was given so that an employer who is having a bad year won’t have to shut down his plan entirely.”
–Eligible employees may contribute up to $6,000 per year to a SIMPLE plan. Employers are still locked in to the 3 percent limit for maximum contribution.
–Tax-deductibility rules are the same as in traditional 401(k) plans.
–Contributions must be 100 percent vested immediately. Early withdrawals are subject to the same 10 percent penalty as other IRAs and qualified plans. However, withdrawals during the two-year period starting after an employee’s initial participation in the plan are subject to a 25 percent early-withdrawal tax.
–The 401(k) option is now open to non-profit agencies of 100 employees or fewer, which formerly were eligible only for the 403(B) retirement plans.
CPA Ellyn Schaefer notes that the top- heavy requirements meant that “highly compensated employees could defer only 125 percent of the average of non-highly compensated employees.” This was troublesome for her small-business clients, not only in the ambiguity of defining a “highly compensated” vs. a “non- highly compensated” employee, but also in the paperwork and time involved.
Says Schaefer: “Top-heavy and non-discrimination rules were so complicated that you would have to figure out both the highly compensated and lowly compensated salaries, plus do the difficult calculations to determine the eligible contribution.”
Sometimes calculation required so much paperwork that the small business had to make a correction in the next year, resulting in yet another form and more bookkeeping.
“The SIMPLE option is so much less complicated (regarding) the discrimination requirements,” Schaefer says.
She stresses two other elements of the SIMPLE options that she believes will be of great benefit to Rochesterians. The first advantage is a new clause that says a non-working spouse can deduct $2,000 from income taxes for an IRA contribution. The second advantage is the repeal of family aggregate rules; this allows each family member in a business to be treated as a separate unit rather than as part of a group whose contribution percentage is based on a lump income.
Phyllis Rimkus, executive vice president of Longaker, Rimkus & Associates Inc., believes the SIMPLE IRA may be the more desirable of the two options for small businesses.
The SIMPLE IRA takes the place of the SARSEP IRA originally set up by Congress for small businesses. (SARSEP stands for Salary Reduction Simplified Employee Pension Plan.) The latter has a greatly restricted availability, with only companies of 25 or fewer allowed to participate; this compares with SIMPLE’s ceiling of 100.
Rimkus said an IRA is easier for a company to set up and maintain because a 401(k) or trust-fund administration has more paperwork, restrictions and regulations. Also, an IRA often is deemed favorable by employees who wish to have more freedom in their investment choices.
While some employees prefer an IRA because of the freedom to take money out before retirement, Rimkus stresses that to do so is contrary to sound financial and retirement planning. Early withdrawals will be taxed and may face additional penalties. In addition, the money will not be available later on when needed.
Rimkus says the SIMPLE IRA was supposed to eliminate the tedious bookkeeping that was needed for the SARSEP IRA. SARSEP stated that any employee who earned $400 in three out of five years must be eligible for the plan. Due to the seasonal and changing employment of some small businesses, such as fast-food enterprises, this bookkeeping was a tremendous headache.
Yet, SIMPLE’s stipulation that, to be eligible, an employee must be expected to earn $5,000 a year, also may create headaches, says Rimkus.
“If you are looking at a business where people drift in and out–seasonal employees or, say, a restaurant–how do you know if they are expected to (earn that amount) or not?” Rimkus says. “I don’t think it would be a problem if you let somebody in(to the plan) and they didn’t make $5,000, but what if you didn’t let somebody in because you didn’t expect them to make $5,000 and then they did? You are going to have a violation problem.”
Bob Ace, senior vice president of Dean Witter Reynolds, says today’s two-income families could mean that employees of small businesses may be able to afford to put in all of the $6,000 limit per year, even if they earn a low salary.
Says Ace: “I am thinking of a lot of my clients where the primary breadwinner may be working for Kodak (or) Xerox, but the other spouse–male or female–may be working at a part-time job, their own little business or whatever.”
Employees should remember that if they do put in the full $6,000 and it represents greater than 3 percent of their income, the employer still can only match up to 3 percent.
Schaefer says she sees the SIMPLE option as a great stress reliever for Rochester small businesses trying to set up retirement plans.
“The new SIMPLE guidelines will be helpful in getting the small businesses to do retirement planning,” she says. “A lot of them didn’t bother because the regulations were too complicated; it took too much of their time. They were too busy just trying to do their regular payroll taxes (and) sales taxes to try to deal with these other regulations.
“Hopefully, SIMPLE will uncomplicate their planning.”
She also mentions that employers and employees who wish to forgo the SIMPLE options and establish a 401(k) with the traditional paperwork may still do so. The one advantage to this option is that the employee may deposit up to $9,500, as opposed to the $6,000 SIMPLE limit.
Employers interested in starting a SIMPLE plan should contact their accountant or financial institution for information packets. IRS clarification packets are expected shortly.
(Janet Collinge is a Rochester-area free-lance writer.)


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