Small business retirement plans created by the Small Business Job Protection Act of 1996. These plans permit small business owners who have fewer than 100 employees to establish an employee retirement plan. Because the required administration of these plans is much less than that required of traditional plans, the cost is low as compared to traditional plans. There are two types of simple plans made available under the 1996 act: the simple IRA and the simple 401 (k). Under both simple plans, employers are required to contribute a 3% match for all plan participants' salaries or a 2% match for eligible employees, regardless of whether or not the employees participate in the plan. An exemption to this rule is that under the simple IRA, but not under the simple 401(k), the employer may lower the 3% match to 1% for every two years out of a five-year period of time. Under both simple plans, all employer matches are immediately VESTED in the employees, which is not the case with traditional retirement plans.
The simple IRA must be the only retirement plan provided by the employer and it must exclude any ROLLOVERS from any other non-simple IRA plans. All employees that earn at least $5000 annually must be eligible to participate on a SALARY REDUCTION PLAN basis if so elected by the employees. Contributions to this plan are not subject to federal income tax and are not subject to nondiscrimination or top-heavy rules applicable to qualified plans. Distributions made from the plan prior to age 59)4 are subject to a 10% surcharge as a penalty, and, in addition, if that distribution is made during the first two years that the employee is participating in the plan, the surcharge becomes 25% of the amount distributed. Transfer from a simple IRA to a regular IRA is permitted only after the employee has participated in the simple IRA for at least two years. If a transfer is made earlier than the two-year requirement, it is subject to a 25% surcharge. Upon termination of employment, the simple plan becomes a regular IRA provided the two-year rule has expired. Simple IRAs do not allow loans. The HEALTH INSURANCEPORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPA ACT) Stipulates thatthe IRA owner is not subject to the 10% penalty for distributions prior to age 59'A if the distributions are used to pay medical expenses in excess of 7.5% of the adjusted gross income.