SIMPLE Employer contribution limit

[Guest Taxwoman]

I know the deferral limits for SIMPLEs changed to $6,500 effective this year and will increase in the future- but I can't find it anywhere that the employer contribution limit was also raised. Some practioners seems to think that it was- any comment? cites?

[wmyer]

For the non-elective contribution, the employer limit will be 2% x the compensation capped at the 401(a)(17) limit, so 2% x 200,000 = 4,000, which is an increase from 3,400.

For the matching, the employer limit is 3% x comp capped at the 401(a)(17) limit, so 3% x 200,000 = 6,000. Keep in mind that previously, the 401(a)(17) limit applied to SIMPLE 401k's but not SIMPLE IRAs for purpose of applying the matching contribution. With the new regs, the compensation cap also applies to the SIMPLE IRA match.

[Guest IRA SPECIALIST]

wmyer

Not sure if I agree with your last sentence "With the new regs, the compensation cap also applies to the SIMPLE IRA match."- where does it say this?

Also- I see firms , will not call names yet- but can provide a link- stating the employer match as $6,500 for year 2001- still I agree with you that the match is still $1 for $1 up to 3% of comp NTE $6,000

[wmyer]

For 2001, the 170,000 limit applies to SIMPLE 401(k) matching, but not to SIMPLE IRA matching. Therefore, the match in a SIMPLE IRA can be as much as 6,500; but the match in a SIMPLE 401(k) can only be 5,100.

Page 120 of the conference report, which you can find at http://www.house.gov/rules/som_1836.pdf indicates that SIMPLE compensation will be capped at 200,000. If SIMPLE compensation is capped at 200k, the 2002 match will actually be less than the permitted 2001 match.

[Appleby]

wmyer

I agree with IRA specialist.

The employer limit as stated has not changed- it is still up to a maximum of $6,000 ( NTE $6,000). This is the key factor.

With reference to the page you reference, this is just to confirm that, SIMPLEs are included in the new definition of compensation "to include an individual’s net earnings that would be subject to SECA taxes but for the fact that the individual is covered by a religious exemption" Notice this was an addendum to the aforementioned compensation cap.

[Appleby]

I stand corrected. The NTE $6,000 appears to be a plan document specification put in place to ensure the employer clearly understands the limits.

Notice 98-4 actually states "…up to a limit of $3 percent of the employees compensation…"

In effect, the employer can contribute $6,500 for 2001

[Gary Lesser]

Except for the nonelective contribution of 2%, there is no compensation cap on the matching contribution (generally 3%) .

See IRC Sec. 408(p)(2)(B)(ii). Thus, $233,333.33 of compensation would be required to match entirely a $7,000 contribution for 2002.

[Appleby]

Gary,

Effective 2002, the compensation cap does apply to matching contributions.

Moderator's Note: See posts below; as well as second page of posts.

[Guest JKG]

I see that previous posts say that the compensation cap applies to SIMPLE-IRA matches for 2002, but I can't find it anywhere in the Code. I can't find it in 401(a)(17) as amended. And 401(p) as amended still only mentions 401(a)(17) with regard to the 2% nonelective contribution.

Any cite to the Code as amended would get me to change my thinking. Otherwise, I have to agree with Gary.

[wmyer]

I don't believe there is currently any cite to the Code possible. However, once the IRS issues further guidance about some outstanding EGTRRA issues, we'll see.

[Gary Lesser]

I still agree with myself. Matching contributions under a SIMPLE are NOT subject to the compensation cap ($200,000 for 2002). I do not expect that a TC will be forthcomming to change the existing rules regarding matching contributions. [Nor do I expect any change under 402(h) regarding SEP exclusions - see post entitled IRC 402(h) Exclusions Limits under EGTRRA.]

If the employer has to match a $7,500 contribution ($7,000 plus catch-up of $500 for 2002), then $250,000 of compensation would be reguired to get a match of $7,500 with a 3% matching formula. If self-employed, $270,709.25 of pre-plan compensation would be required ($270,709.25 x .9235 x .03).

[Appleby]

wmyer referred page 120 of the conference report-

[Appleby]

Gary,

Upon closer scrutiny- I agree with you. The new compensation cap does apply to SIMPLE IRAs , but to the extend it applies before EGTRRA, which is ONLY to non-elective contributions

[Gary Lesser]

At last, we all agree.