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Legislation Boosting SIMPLE Plans for Small Businesses Introduced

A bipartisan bill that its sponsors say will provide greater flexibility and access to small business employees and their employers seeking to utilize SIMPLE plans as an option for saving for retirement has been introduced in the U.S. Senate.

The SIMPLE Plan Modernization Act, introduced July 13 by Sens. Susan Collins (R-ME) and Mark Warner (D-VA) would increase the contribution limit for SIMPLE plans. The bill’s sponsors say that increasing the limit would achieve two basic goals:

  • encourage more small business employers to offer a retirement savings benefit to their employees; and
  • allow small business employees to save even more each year on a tax-deferred basis.

Specifically, according to a press release, the SIMPLE Plan Modernization Act would:

  • Raise the contribution limit for SIMPLE plans from $12,500 to $15,500 (halfway between current SIMPLE plans and traditional 401(k)s) for the smallest businesses (1 to 25 employees), with a corresponding increase in the catch-up limit from $3,000 to $4,500.
  • Give businesses with 26 to 100 employees the option of the higher contribution limits, and, in order to continue to encourage them to transition to 401(k)s when they can do so, increase their SIMPLE plan mandatory employer contribution requirements by one percentage point if they elect the higher limits.
  • Allow for a reasonable transition period for employers who hire additional employees above 25.
  • Make the limit increases unavailable if the employer has had another defined contribution plan within the past three years (to encourage businesses that already have qualified plans to retain them).
  • Modernize SIMPLE plan form filing requirements and modify the transition rules from SIMPLE plans to traditional plans to facilitate and encourage such transitions.
  • Direct Treasury to study the use of SIMPLE plans and report to Congress on such use, along with any recommendations.

Congress established SIMPLE (Savings Incentive Match Plan for Employees) retirement plans in the Small Business Job Protection Act of 1996 to encourage small businesses to provide their employees with retirement plans. Then, as now, retirement plans among small employers were, and continue to be, scarcer than among medium and large employers. While these smaller businesses had access to tax-favored retirement savings plans (including traditional 401(k)s), those plans are generally more expensive to administer.

Businesses with 100 or fewer employees may currently create SIMPLE retirement savings accounts for their employees, as long as those employers do not offer another employer-sponsored retirement plan.