A SIMPLE 401(k) plan is a 401(k) plan established by a small business for its employees. Earnings accrue on a tax-deferred basis and distributions are treated as ordinary income to the participant.
The following types of contributions can be made to a SIMPLE 401(k):
Salary deferral contributions by the participants from their compensation on a tax-deferred basis. This means that the contributions reduce the participant’s taxable compensation
Employer contributions. Employers can make either
A matching contribution of $1 for $1 up to 3% of the participant’s compensation. This matching contribution is made only to the SIMPLE 401(k) accounts of employees who make salary deferral contributions or
A 2% non-elective contribution to each eligible participant’s SIMPLE 401(k) accounts, whether or not the employee makes a salary deferral contribution
Employers are able to deduct employer contributions to the SIMPLE 401(k) plan, providing the contributions are within statutory limits.
Earnings on contributions accrue on a tax-deferred basis.
An employer is eligible to establish A SIMPLE 401(k) plan only if it had no more than 100 employees who earned $5,000 or more in the preceding year. This is referred to as the 100-employee limitation.