Subject: Newsletter: SIMPLE 401(k) plans: 100-employee limit
Date: Wed, 15 Jan 1997 11:39:05 -0500

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.............. CROW FOR SUPPER TONIGHT, DEAR .........

An earlier issue of the BenefitsLink Newsletter noted
that the 100-employee limit for SIMPLE IRA plans does not
apply to SIMPLE 401(k) plans.

Alas, that is wrong.  The 100-employee rule does indeed
apply to SIMPLE 401(k) plans.

This is because the Internal Revenue Code (as revised by
the Small Business Job Protection Act) specifically uses
the term "eligible employer" in the SIMPLE 401(k) rules.
Although that term is not defined in the SIMPLE 401(k)
rules, those rules also say that terms used in the SIMPLE
401(k) rules shall have the same meaning given in the
SIMPLE IRA rules.  (See amended sections 401(k)(11)(A)
and 401(k)(11)(D)(i).)

The troublemaker: the SIMPLE IRA rules defines "eligible
employer" to mean an employer that had "no more than 100
employees who received at least $5,000 of compensation
from the employer for the preceding year."  (Section
408(p)(2)(C)(i), as amended.)

Part of my confusion is the unfortunate terminology used
in the new law ... mayhaps I read too much into the fact
that the Code as amended contains no definition of
"SIMPLE 401(k) plan" although it does define a SIMPLE IRA
(technically called a "simple retirement account"
under section 408(p) as amended).

(Rather than defining "SIMPLE 401(k) plan", the Code as
amended states that any 401(k) plan can avoid the
nondiscrimination test that applies to employees'
elective deferrals (the "ADP" test), the
nondiscrimination test that applies to the employer's
matching contributions and employee after-tax
contributions (the "ACP" test) and the top-heavy minimum
contribution that might be required otherwise, if (i) the
employer passes the 100-employee test (gotta be an
"eligible employer"), (ii) the plan requires certain
fully-vested employer contributions, and (iii) the
employer sponsors no other plan providing current
contributions or benefits.  But it appears the retirement
plan industry is coming to call a 401(k) plan that meets
those rules a "SIMPLE 401(k) plan.")

Another siren calling me to the rocks was the way the
term "eligible employer" is NOT used in the amended Code
provision that lets a 401(k) plan avoid the ACP test.
Take a look at 401(m)(10) as added by the new legislation
... it might be a glitch.  One might venture that even an
employer having more than 100 employees could use the new
SIMPLE 401(k) rules to avoid the ACP test starting in
1997 if the plan requires certain fully-vested employer
contributions and the employer sponsors no other plan.
The required (and only permitted) employer contributions
generally would be a 100% match on elective deferrals up
to 3% of pay.  Such a plan still would need to satisfy
the ADP test and the top-heavy minimum contribution
rules, though, and the legislative history does not
indicate that such a difference was intended.

THANKS to all the readers who pointed out the error in
the earlier BenefitsLink Newsletter.   -- Dave Baker

.............. FOR FURTHER DISCUSSION ...................

Want to talk further about SIMPLE plans?  Use the Message
Board on BenefitsLink set up especially for SIMPLE plan
questions and answers ... share your ideas and help
others.  Set your browser to

-->   http://www.benefitslink.com/

and head for the Message Boards.

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