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SIMPLE Problems

The only way your SIMPLE plan will ever rival a 401(k) is if you get out and fight for it.

Entrepreneurs are weary of being left behind. They want equal treatment when it comes to the tax and contribution features of pension plans. Now, groups representing small businesses are pushing Congress to put SIMPLE (Savings Incentive Match Plan for Employees) on the same footing as the 401(k).

When Congress tried to help more small businesses launch pension plans, it created SIMPLE in 1996 to clear regulatory hurdles of 401(k) plans. Legally, employers with 100 or fewer employees who receive at least $5,000 in compensation can adopt a SIMPLE plan.

But lawmakers neglected to make the contributions and thus the tax deductibility of SIMPLE plans equal to 401(k) plans. For example, those under the age of 50 in a 401(k) plan can save up to $12,000 annually in pre-tax dollars in 2003, while small-business owners and employees under 50 can only put away $8,000 in a SIMPLE plan. (Recent law changes allow those 50 or older to make additional "catch-up" contributions for both SIMPLE and 401(k) plans.) That's a 57 percent greater contribution for employees in companies with 401(k) plans. Although small firms are free to establish 401(k) plans, many don't because of the complexity and cost involved. In addition, 401(k) contribution limits are increasing by $1,000 each year until 2006 when the 401(k) maximum contribution reaches $15,000. At that point, the SIMPLE plan contribution limit will only be $10,000.

While Eric G. Storck of Blade Runners Inc., a Fairfax, Virginia, landscaping maintenance company, likes the administrative simplicity of the SIMPLE plan, he would like to see the contribution limits increased so they are the same as 401(k) limits. Storck, 40, contributes the maximum to his SIMPLE plan each year, but he says the limits are low compared to those of a 401(k).

This situation represents just one glaring example of how the tax code excludes business owners and most small enterprises from some of the tax benefits enjoyed by larger companies. Larger companies have an advantage because they are better able to administer and fund 401(k) plans, says David Mack, government affairs manager for Washington, DC-based National Small Business United. "With fewer restrictions and more incentives," he maintains, "retirement savings rates would increase dramatically for small businesses and their employees."

In the months ahead, entrepreneurs will be encouraging Congress to make the necessary changes in this area. Says Mack, "Pension parity is a top priority for small-business owners."

Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 15 years.

This story appears in the March 2003 issue of Entrepreneur. Subscribe »