Is A Simple 401K A Qualified Plan?

Making it simple with a SIMPLE 401K. How to find out if a SIMPLE 401K plan is right for you and your simply successful retirement future.

SIMPLE 401K plans are designed with the small business owner in mind. This requires 100 or fewer employees who have not made over $5000 compensation in the calendar year. The employee has the option to elect to defer some of their compensation, but the employer must contribute a matching contribution up to 3% of each eligible employee’s pay or a non-elective contribution that equals 2% of each eligible employee’s pay. SIMPLE 401K plans can only be set up if there are no other retirement plans currently in place.

What Is A Qualified Plan:

A retirement plan is considered qualified once it meets certain Internal Revenue Codes and ERISA regulations. Once these are met the plan is set up and employees can begin making annual contributions. These contributions reduce an employee’s taxable income which is a very important benefit. The contributions to the qualified plan remain tax deferred until the maturity of the plan or it may be rolled over into another tax deferred vehicle. Qualified plans fall into one of three categories which are Defined Benefit, Defined Contribution, or Hybrid.

Is A SIMPLE 401K A Qualified Plan:

The answer here is yes. A SIMPLE 401K plan is considered a Defined Contribution plan. The amount at retirement depends solely on the amount contributed throughout the life of the plan. More may be accumulated with these qualified plans because of the employee matching that takes place in 401K’s. These tax benefits, such as tax deferral, are only available to these qualified plans. What is nice with SIMPLE 401K plans is that all contributions made are considered fully vested, and therefore no part can be taken away upon retirement or leaving the company.

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