2010 SIMPLE vs SAFE HARBOR 401(k) vs TRADITIONAL 401(k) COMPARISON

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1 2010 SIMPLE vs SAFE HARBOR vs TRADITIONAL COMPARISON John M. Peterson, CPA Iris Dodson, CPA (757) (757) SIMPLE Maximum size of adopting employer No more than 100 employees earning at least $5,000 in preceding year 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: Annual limit on employee salary deferral s Lesser of $11,500 ($14,000 age 50+) or Lesser of $16,500 ($22,000 age 50+) or when combined with employer s and forfeitures Lesser of $16,500 ($22,000 age 50+) or when combined with employer s and forfeitures Roth provision Not available Optional 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 nondiscrimination 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 amount Additional Match Not Allowed Up to 4% of Employee Pay calculated on a max of 6% of pay Discretionary total Employee/Employer s can not exceed Alternative to employer Matching Contribution 2% of pay for all eligible (maximum $4,900 based on 2010 $245,000 compensation limit) 3% of pay for all eligible (2010 max $7,350) Discretionary total Employee/Employer s cannot exceed

2 SIMPLE Vesting 100% vested : 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 Age-Weighted Cross-Tested greatest flexibility to target specific groups or participants for higher s Discretionary; Can be Integrated with Soc Security Age-Weighted Cross-Tested greatest flexibility to target specific groups or participants for higher s Maximum combined annual s 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: anti-discrimination testing Not required Not required Required Top heavy testing Not required Not required Required; if top-heavy, mandatory minimum 3% 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 s 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 does not apply.

3 SIMPLE Other Features: Plan loans Not available Available Available Access to account for inservice withdrawals Unlimited, unless qualifying hardships allowed, unless qualifying hardships allowed Penalty for account distributions (in first 2 years of employee if under 59 ½) 25% penalty (if under 59 ½); no tax free rollovers to non-simple s 10% penalty (if under 59 ½); tax free rollovers to s or other plans allowed 10% penalty (if under 59 ½); tax free rollovers to s or other plans allowed Possible business owner motivation Minimize rank and file Minimize rank and file if using match safe harbor Maximize rank and file Governmental employer eligibility Yes No No Allowable rollovers into Plan Only from other SIMPLE s From s, From s, Allowable rollovers out of Plan Only into SIMPLE s during first 24 months, then into traditional, Into s, (may not rollover into SIMPLE ) Into s, (may not rollover into SIMPLE ) Employer tax deduction limit for combined s 25% of eligible payroll plus 25% of eligible payroll plus Can limit sending s to only one investment program Depends on whether there is a Designated Financial Institution (DFI) Yes Yes Self-employed deduction limit ; match based on gross earnings before self-employed s 25% of net after deducting selfemployed s 25% of net after deducting selfemployed s Plan Fiscal Year Must be calendar Fiscal years allowed Fiscal years allowed Deadline for establishing new plan for current year October 1 st October 1 st * Earlier of last day of first plan year* * Deferrals are not allowed prior to effective date of plan

4 MAJOR REASONS TO CHOOSE A SIMPLE 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 salary deferrals Avoid discrimination testing for Match if Contribution is made 1 Top-heavy minimum satisfied by Contribution 1 Allow or provide higher employee levels ($16,500 vs. $11,500 / $22,000 vs $14,000 for participants age 50 +) Allow or provide higher (or lower) employer levels 2 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 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 s (except top-heavy requirements) Apply vesting schedule to employer s 1 & Discretionary matching s are only allowed on 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

5 Major reasons to choose a SIMPLE 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 1. Avoid discrimination testing for salary deferrals. 2. Avoid discrimination testing for match if safe harbor match elected. 3. Avoid top-heavy minimum if 3% non-elective elected or if matching safe harbor elected and discretionary matching s are only made on Deferrals made from the first 6% of compensation. 4. Allow or provide higher employee 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 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. 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 1. Reasons #4 14 listed above in addition to the following - 2. Avoid mandatory employer s (except top-heavy requirements). 3. Apply vesting schedule to employer s. The following disclosure is required pursuant to the practice of tax advisors under IRS Circular 230 and applicable state and local tax provisions, under the regulations that govern the practice of tax advisors. Any advice concerning Federal, state and local tax issues contained in this written communication (and any attachments) has not been written nor is it intended by the author or Goodman & Company, L.L.P. to be used, and cannot be used, for the purpose of (i) avoiding federal, state or local tax penalties that may be imposed by the Internal Revenue Service or applicable state or local tax provisions, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. If a formal covered opinion intended to provide such protection is desired, please contact us to discuss the issues and costs involved in preparation of such a covered opinion.

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