Arkansas Administrative Code
Agency 006 - Department of Finance and Administration
Division 05 - Division of Revenues
Regulation 1997-4 - Comprehensive Individual Income Tax Regulations
Rule 26-51-414 - DEFERRED COMPENSATION PLANS
Rule 6.26-51-414 - Savings Incentive Match Plan for Employees (SIMPLE)
Current through Register Vol. 49, No. 9, September, 2024
Beginning in tax years after 1996, eligible employers may maintain SIMPLE retirement plans to provide a tax-favored means of providing for employees' retirement. An eligible employer is an employer that:
1. Employs no more than 100 employees who each received at least $5,000 of compensation from the employer the preceding year, and
2. Does not maintain another employer-sponsored retirement plan to which contributions were made or benefits accrued.
An eligible employer who establishes and maintains a SIMPLE plan for at least one year, but thereafter fails to qualify, continues to be treated as an eligible employer for the two years following the last year in which it did qualify.
An employee is eligible to participate in any calendar year if he or she received at least $5,000 of compensation from the employer during each of the two preceding calendar years and is reasonably expected to receive at least $5,000 in compensation during the current calendar year. A self-employed individual is treated as an employee and may participate in a SIMPLE plan if the compensation threshold is met.
There are two types of SIMPLE plans.
1. Cash or deferred arrangement (CODA) incorporated in a qualified plan (IRC Sec. 401(k)(11)(c)); or
2. An IRA established for each participating employee.
A SIMPLE plan must permit each eligible employee to elect to have the employer make payments either (1) directly to the employee in cash or (2) as a contribution to the SIMPLE account. No contribution, other than elective contributions, employer matching contributions, and nonelective employer contributions may be made to a SIMPLE account. However, a rollover from another SIMPLE account may be received.
Elective contributions are limited to $6,000 for any calendar year. The employer must match the elective contribution of an employee in an amount not exceeding three percent (3%) of the employee's compensation. However, the employer may elect to limit its match, for all eligible employees, to a smaller percentage of compensation not less than one percent (1%). The election may not be made in more than two out of every five years.
Nonelective contributions may be made as an alternative to matching contributions. The employer may elect to make nonelective contributions of two percent (2%) of compensation for each employee who is eligible to participate and who has at least $5,000 of compensation from the employer for the calendar year. The compensation that may be taken into account in determining the two percent nonelective contribution may not exceed an indexed dollar amount. For 1996, this amount is $150,000 for most plans.
Elective contributions of employees are not includable in gross income when made. They are taxed only under the distribution rules that govern distributions from conventional IRAs. IRC Sec. §408(p)(i)(A). Any elective contributions under this plan are included in the sum of elective deferrals, subject to an annual limit on the amount that can be excluded from income. IRC Sec. 402(g)(3)(D).
The employer is entitled to a deduction for its contributions to a SIMPLE account. For deduction purposes, the employer contributions to a SIMPLE account are treated as if they were made to a plan subject to the requirements of IRC Sec. 404(m).
For self employed persons, the contribution is not a business expense, therefore it is not deductible on the schedule C. In the case of a sole proprietorship the contribution may only be claimed as an adjustment to income.
Example: XYZ Company maintains a SIMPLE retirement plan for its eligible employees. Melinda Jones earns $30,000 from XYZ Company. The company matches the elective contribution in the amount of 3% of the employee's compensation. Ms. Jones elects to contribute $6,000.00 to her SIMPLE account. Ms. Jones has no other income deferrals. XYZ Company makes a matching contribution of $720.00 to Ms. Jones' SIMPLE account. [($30,000 - $6,000) x 3%]. Ms. Jones' wages reported on her W-2 are $24,000.00 and XYZ Company may deduct the $720.00 as an expense.
