May
2011
Small
Businesses Add Value for Employees Act of 2011
On
April 14, 2011, Representatives Ron Kind (D-WI) and David Reichert
(R-WA) introduced the Small Businesses Add Value for Employees Act
of 2011 (the SAVE Act). The proposed legislation would relax some
of the rules for SIMPLE IRAs and create a new Automatic Deferral
IRA program. It is a reintroduction of similar legislation that
was introduced in 2008 and 2009.
Proposed
Changes for the SIMPLE IRA
A
Savings Incentive Match Plan for Employees (SIMPLE) is funded with
an Individual Retirement Account (IRA). It is available to small
employers with 100 or fewer employees who do not sponsor another
qualified plan. Here is a comparison of current SIMPLE IRA requirements
and changes proposed in the SAVE Act.
| |
Current
Law
|
SAVE
Act
|
Portability |
A
rollover from a SIMPLE IRA to a different plan type (IRA,
401(k), 403(b)) is prohibited until the participant has
two years of participation under the SIMPLE.
|
Removes
the two year requirement, thus allows participants to roll
over their retirement account to another qualified plan
or IRA.
|
Mid-year Changes |
The
SIMPLE IRA must operate on a calendar year basis. The employer
may not change from a SIMPLE IRA to another retirement plan
type or terminate the plan mid-year.
|
Allows
an employer to make mid-year changes to the SIMPLE IRA,
change to another plan type (like a 401(k) plan), or terminate
the plan.
|
Premature Distribution Penalty |
Distributions
prior to age 59½ are subject to a 25% excise tax during
the employee's first two years of participation and 10%
thereafter.
|
Repeals
the 25% penalty and applies the 10% penalty to all years,
the same rule that applies to other qualified retirement
plans.
|
Contribution Limit |
SIMPLE
IRAs have an annual deferral limit of $11,500 (2011) compared
to $16,500 (2011) for 401(k) plans.
|
Increases
the annual deferral limit to conform to the deferral limit
for 401(k) plans.
|
Employer Contribution |
Employers
are required to contribute either a matching contribution
of 100% up to 3% of pay, or a 2% of pay non-elective contribution.
|
Allows
an employer to make an additional non-elective or matching
contribution of up to 10% of pay. Subjects SIMPLE IRAs to
the 415 limit that currently applies to defined contribution
plans.
|
Automatic
IRA
The
SAVE Act would create a voluntary automatic IRA plan for small business
owners.
- Employers
could automatically deduct from eligible employees' pay, a certain
percentage of pay that would be deposited into an IRA.
- The
automatic IRA may be a Roth IRA
- Employees
could make an election not to participate or to contribute a different
percentage.
- The
automatic contribution percentage must be uniform for all employees,
must be at least 3% the first year increased by 1% each subsequent
year, and may never exceed 15% of pay.
- Employees
must receive a written notice of their rights and obligations
within a reasonable time period before they are eligible to participate.
- The
employer could receive a tax credit to cover start-up costs.
Other
Changes
The
SAVE Act would also provide the following:
- An
increase in the maximum automatic deferral amount in 401(k) plans
from 10% of pay to 15% of pay.
- Allow
employees to transfer unused amounts from a flexible spending
account (maximum $250 per year) to a 401(k), 403(b), or governmental
457(b) plan or IRA. The amount would be treated as an elective
deferral.
- Increase
the tax credit for small employers to help cover plan start-up
costs.
- Direct
the Department of the Treasury Office of Financial Education and
the Department of Labor to develop and implement an outreach plan
to educate small employers of the types of retirement plans available
and how they work.
- Require
disclosure to participants of the amount of monthly lifetime income
the participants could receive from their account balance.
Next
Steps
The
proposed legislation will be referred to the House Committee of
Ways and Means. We will keep you informed of any developments.
While
this communication may be used to promote or market a transaction
or an idea that is discussed in the publication, it is intended
to provide general information about the subject matter covered
and is provided with the understanding that Principal Trust is not
rendering legal, accounting, or tax advice. It is not a marketed
opinion and may not be used to avoid penalties under the Internal
Revenue Code. You should consult with appropriate counsel or other
advisors on all matters pertaining to legal, tax, or accounting
obligations and requirements. |
Partner Login
