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In 1996, Congress passed legislation authorizing employers to sponsor a "Savings Incentive Match Plan for Employees" or "SIMPLE" Plan. Congress's objective was to encourage employers to offer their employees a retirement savings program that was similar to a 401K Profit Sharing & Savings Plan, but without the associated administrative complexity or expense.
A SIMPLE Plan can be set up as either an IRA arrangement or a 401(k) arrangement. In either instance, employees are generally able to make pre-tax contributions via payroll deduction in an amount up to $10,000 per year. The plan sponsor is required to contribute either (a) by matching employee contributions $1.00 for $1.00 up to the first 3% of pay or (b) by contributing 2% of pay for all eligible employees, whether or not they contribute for themselves. (In the IRA version of SIMPLE, the employer can elect to limit matching contributions to the first 1 % contributed by employees, rather than 3%, in two out of five years.)
Both employer and employee contributions to a SIMPLE Plan are fully and immediately vested. These plans avoid most of the testing and nondiscrimination rules applicable to traditional 40l(k) plans. As a result, they can generally be adopted and maintained at a much lower administrative cost than a typical 401(k) arrangement.