A SIMPLE 401(k) plan has to meet two basic qualification requirements. First, you must have a written plan, which can be an IRS prototype or an individually designed plan. Banks, insurance companies, mututal funds and other financial institutions can help with the plan. Second, the plan’s assets will need to be invested in a trust or custodial account. This is set up by a legal instrument, and you may need to ask for legal assistance with this. Once the plan is established, the notifications that you must give to your employees are the same as those that apply for a SIMPLE IRA plan.
How much you can contribute to a SIMPLE 401(k) plan and claim as a deduction
Contributions to a SIMPLE 401(k) plan are made through employees’ salary deductions, and matching or nonelective contributions by you as the employer, just as they are under a SIMPLE IRA plan.
Qualified Plans – Keogh or H.R. 10 Plans
How to set up a Qualified Plan
As in the case of a SIMPLE plan, there are two different types of qualified plans, in terms of how contributions are made - defined contribution plans and defined benefit plans. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.
A profit-sharing plan is for sharing your business profits with your employees, but you can still have a profit-sharing plan even if contributions to the plan do not come out of your business profits. There does not have to be a definite formula for determining the profits to be shared, but there must be a formula for systematically allocating contributiions among the employees and for distributing accumulated funds to the employees. There is more flexibility in making contributions under a profit-sharing plan than there is under a money purchase pension plan or a defined benefit plan.
In a money purchase pension plan, contributions are fixed, for example as a percentage of employee compensation, regrdless of whether your business has a profit. This includes contributions to your own pension fund as a self-employed individual, in which case your contribution is based on your net earnings from the business.
In a defined benefit plan, contributions are based on what is needed to provide certain pre-determined benefits to plan participants. This requires actuarial assumptions and calculations, and you may need ongoing assistance to maintain this type of plan.
A qualified plan, just like a SIMPLE 401(k) plan, has to meet two basic qualification requirements. First, you must have a written plan, and second, the plan’s assets will need to be invested in a trust or custodial account.
If your plan is a money purchase pension plan or a defined benefit plan, there are minimum funding requirements. You will have to make quarterly installment payments to cover the amount needed to fund the defined benefits, calculated based on the actuarial assumptions.