12/6/2009
2010 SIMPLE vs SAFE HARBOR 401(k) vs TRADITIONAL 401(k)
COMPARISON
John M. Peterson, CPA Iris Dodson, CPA (757) 457-8440 (757) 457-8444
SIMPLE IRA
Safe Harbor 401(k)
Traditional 401(k)
Maximum size of adopting employer
No more than 100
employees earning at least
$5,000 in preceding year
None None
Employee Contributions:
Maximum eligibility
requirements Employees who earned more than $5,000 in any two prior years
Service: 1 year (1,000 hours minimum) Age: 21
Service: 1 year (1,000 hours minimum) Age: 21
2010 Annual limit on employee salary deferral contributions
Roth provision
Lesser of $11,500 ($14,000 age 50+) or
100% of pay
Not available
Lesser of $16,500 ($22,000 age 50+) or 100% of pay when combined with employer contributions and forfeitures
Optional
Lesser of $16,500 ($22,000 age 50+) or 100% of pay when combined with employer contributions and forfeitures
Optional
Employer Contributions:
Requirement Mandatory Mandatory Discretionary
Matching Formula $/$ on first 3% of pay; can elect as low as 1% in two of every five years
100% of first 3% of pay, plus 50% of next 2% of pay (or 100% of first 4% of pay)
Flexible but must pass non- discrimination testing
Maximum Match Capped at the lesser of 3% of pay or $11,500
($14,000 age 50+ not subject to compensation limit)
Lesser of 4% of pay or
$9,800
(based on 2010 $245,000 compensation limit)
100% of net pay when combined with 401(k) amount
Additional Match Not Allowed Up to 4% of Employee Pay calculated on a max of 6% of pay
Discretionary – total Employee/Employer
contributions can not exceed 100% of pay
Alternative to employer Matching Contribution
2% of pay contribution for all eligible (maximum
$4,900 – based on 2010
$245,000 compensation limit)
3% of pay contribution for all eligible (2010 max $7,350)
Discretionary – total Employee/Employer contributions cannot exceed 100% of pay
SIMPLE IRA
Safe Harbor 401(k)
Traditional 401(k)
Vesting 100% vested Safe Harbor: 100% vested Other Employer
Contributions: subject to vesting up to 6 years
Subject to vesting schedule up to 6 years
Other Contributions:
Employer Profit Sharing
Contributions Not allowed Discretionary; Can be -
◦Integrated with Soc Security
Discretionary; Can be
◦Integrated with Soc Security
◦Age-Weighted ◦Age-Weighted
◦Cross-Tested – greatest
flexibility to target specific groups or participants for higher contributions
◦Cross-Tested – greatest flexibility to target specific groups or participants for higher contributions
Maximum combined annual contributions per employee
$23,000 ($11,500 employee plus $11,500 maximum match) ($28,000 total if employee is age 50 or more)
$49,000 ($54,500 if
employee is age 50 or more) $49,000 ($54,500 if employee is age 50 or more)
Concurrent plans Not allowed (except union plan)
Can combine with ESOP, defined benefit, etc.
Can combine with ESOP, defined benefit, etc.
Testing:
401(k) anti-discrimination testing
Not required Not required Required
Top heavy testing Not required Not required Required; if top-heavy, mandatory minimum 3% contribution
Compliance:
Compliance
requirements No Form 5500; trustee summary report required
Form 5500 and SAR
required (Form 5500 EZ for one participant)
Form 5500 and SAR required (Form 5500 EZ for one participant)
Compliance costs Minimal Varies Varies
Deadline for depositing employee contributions
As soon as possible, but never more than 30 days after end of month of withholding
7 business days following payroll date*
7 business days following payroll date*
* Large plans ( > 100 eligible ): As soon as deposits can be segregated from the assets or the employer- 7 day Safe Harbor
does not apply.
12/6/2009
SIMPLE IRA
Safe Harbor 401(k)
Traditional 401(k)
Other Features:
Plan loans Not available Available Available
Access to account for in-
service withdrawals Unlimited None, unless qualifying
hardships allowed None, unless qualifying hardships allowed
Penalty for account distributions
(in first 2 years of employee participation if under 59 ½)
25% penalty (if under 59 ½);
no tax free rollovers to non-SIMPLE IRAs
10% penalty (if under 59 ½);
tax free rollovers to IRAs or other plans allowed
10% penalty (if under 59 ½); tax free rollovers to IRAs or other plans allowed
Possible business owner motivation
Minimize rank and file participation
Minimize rank and file participation if using match safe harbor
Maximize rank and file participation
Governmental employer eligibility
Yes No No
Allowable rollovers into Plan
Only from other SIMPLE IRAs
From Traditional IRAs, Qualified Plans, 403(b) Plan or
Government 457 Plans
From Traditional IRAs, Qualified Plans, 403(b) Plan or
Government 457 Plans
Allowable rollovers out of Plan
Only into SIMPLE IRAs during first 24 months, then into traditional, Qualified Plans, 403(b) Plan or
Government 457 Plans
Into Traditional IRAs, Qualified Plans, 403(b) Plan or
Government 457 Plans (may not rollover into SIMPLE IRA)
Into Traditional IRAs, Qualified Plans, 403(b) Plan or
Government 457 Plans (may not rollover into SIMPLE IRA)
Employer tax deduction limit for combined contributions
None 25% of eligible payroll
plus 401(k) 25% of eligible payroll plus 401(k)
Can limit sending contributions to only one investment program
Depends on whether there is a Designated Financial Institution (DFI)
Yes Yes
Self-employed deduction limit
None; match based on gross earnings before self-employed’s contribution
25% of net after deducting self-
employed’s contribution
25% of net after deducting self-
employed’s contribution
Plan Fiscal Year Must be calendar Fiscal years allowed Fiscal years allowed
Deadline for establishing
new plan for current year
October 1st October 1st * Earlier of last day of first plan year*
*401(k) Deferrals are not allowed prior to effective date of plan
MAJOR REASONS TO CHOOSE A SIMPLEIRA
Safe Harbor 401(k)
Traditional 401(k) Avoid top-heavy rules and discrimination testing for salary deferrals
Can reduce match to as low as 1% of compensation in 2 of every 5 years No compliance costs (no Form 5500 or testing)
No fiduciary responsibility for participant investment choices Only option available for governmental entities
Lowest implementation and administrative cost
Avoid discrimination testing for 401(k) salary deferrals
Avoid discrimination testing for Match if Safe Harbor Contribution is made1 Top-heavy minimum contribution satisfied by Safe Harbor Contribution1
Allow or provide higher employee contribution levels ($16,500 vs. $11,500 / $22,000 vs $14,000 for participants age 50 +) 2
Allow or provide higher (or lower) employer contribution levels 2
Limit employee's in-service withdrawal rights
Limit employee investment options to one financial institution without “Designated Financial Institution” issues
Avoid higher early withdrawal penalty and rollover prohibition during employee’s first 2 years of participation
Provide plan loans
Provide creditor protection for plan assets
Provide employer oversight for plan distributions Non-calendar plan years allowed
Concurrent plans allowed
Plan can be customized to achieve employer objectives
Avoid mandatory employer contributions (except top-heavy requirements) Apply vesting schedule to employer contributions
1 Safe Harbor & Discretionary matching contributions are only allowed on 401(k) Deferrals made from the first 6% of compensation – Maximum discretionary match cannot exceed 4% of pay
2 Contributions made by highly compensated employees may be limited by ADP/ACP non-discrimination testing
12/6/2009
Major reasons to choose a SIMPLE IRA
1. Avoid top-heavy rules and discrimination testing for salary deferrals. 2. Can reduce match to as low as 1% of compensation in 2 of every 5 years. 3. No compliance costs (no Form 5500 or testing).
4. No fiduciary responsibility for participant investment choices. 5. Only option available for governmental entities.
6. Lowest implementation and administrative cost.
Major reasons to choose a Safe Harbor 401(k)
1. Avoid discrimination testing for 401(k) salary deferrals.
2. Avoid discrimination testing for match if safe harbor match elected.
3. Avoid top-heavy minimum contribution if 3% non-elective contribution elected or if matching safe harbor elected and discretionary matching contributions are only made on Deferrals made from the first 6% of compensation.
4. Allow or provide higher employee contribution levels ($16,500 vs $11,500 / $22,000 vs $14,000 for participants age 50 and over).
5. Allow or provide higher (or lower) employer contribution levels. 6. Limit employee's in-service withdrawal rights.
7. Limit employee investment options to one financial institution without “Designated Financial Institution” issues.
8. Avoid higher early withdrawal penalty and rollover prohibition during employee’s first 2 years of participation. 9. Provide plan loans.
10. Provide creditor protection for plan assets.
11. Provide employer oversight for plan distributions. 12. Non-calendar plan years allowed.
13. Concurrent plans allowed.
14. Plan can be customized to achieve employer objectives.
Major reasons to choose a Traditional 401(k)
1. Reasons #4 – 14 listed above in addition to the following -
2. Avoid mandatory employer contributions (except top-heavy requirements). 3. Apply vesting schedule to employer contributions.
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