SIMPLE solution? A new retirement plan may bring Congress and the president together on pension reform - Savings Incentive Match Plan for Employees

Entrepreneur, May, 1996 by Stephen Barlas

A new retirement plan may bring Congress and the president together on pension reform.

Pension simplification for small business is one issue the Clinton administration and the Republican Congress agree on. Both the president and the Republicans support almost all the small-business pension provisions in the tax-cut bill, which was part of the broader budget reconciliation bill passed by Congress last year and vetoed by President Clinton in December.

The major difference--and even that overstates the distance between the Democrats' and Republicans' views--involves creation of a new pension plan for companies with fewer than 100 employees. Called "SIMPLE" (Savings Incentive Match Plan for Employees), it's sponsored by Sen. Bob Dole

(R-KS) and is similar to the Clinton administration's counterpart, "NEST" (National Employee Savings Trust).

The tax-cut bill includes pension reforms for small business that go beyond SIMPLE and NEST. But SIMPLE has drawn most of the attention because it's a starter pension plan, which would be easier to establish--although it may have fewer advantages--than a 401(k) plan.

Ron Merolli, director of pension legislative and technical services at National Life of Vermont in Montpelier, says SIMPLE has limited appeal to many entrepreneurs because they are allowed to contribute only $6,000 a year. He is much more excited about provisions in the tax bill that would create a safe harbor for businesses of any size that want to set up 401(k) plans, where owners could put away considerably more for both themselves and their employees.

Pension plans in small businesses are relatively rare. Federal statistics from 1993 show only 24 percent of full-time workers in private firms with under 100 employees were covered by employer-sponsored retirement plans. In contrast, 73 percent of workers in firms with more than 1,000 employees were covered.

The major problem for small business is the complexity of the Employee Retirement Income Security Act of 1974 (ERISA). The attraction of a SIMPLE plan is that companies would not have to comply with complicated "nondiscrimination" rules set by ERISA, which require costly, confusing testing of employee income levels. In addition, employer contribution requirements are straightforward: Companies must match employee contributions up to 3 percent for three years. To be eligible to participate in the plan, an employee must have been paid an annual salary of at least $5,000 in each of the two preceding years and expect to get as much in the coming year.

Paula Calimafde, a Bethesda, Maryland, attorney and chair of the Small Business Council of America, explains that a new company with limited cash flow might select a SIMPLE IRA. A slightly more mature company might opt for a SIMPLE 401(k); then it could match employee contributions beyond 3 percent.

The disadvantage of the SIMPLE plans is that an employee can set aside only $6,000 annually. A company looking to attract top-drawer talent might want to offer a bigger inducement in the form of a regular 401(k). These allow employees to save $9,240; the company can kick in an additional $30,000 in total contributions.

The problem is that many smaller companies have tried regular 401(k)s and thrown up their hands because of the nondiscrimination testing requirements. The tax bill solves that problem by creating a safe harbor, whereby the requirement for testing is eliminated if a company--of any size--kicks in 3 percent of an employee's salary (even if the employee makes no contribution himself) and matches 50 percent of any contribution above 3 percent.

Sam Gilbert, president and owner of United Plan Administrators Inc., a benefits consulting firm in Westlake Village, California, and a delegate to the White House Conference on Small Business held last June, says it makes sense for small businesses to go for traditional pensions like regular 401(k)s. He believes the $6,000 employee contribution cap on SIMPLE plans limits their appeal.

Despite the rare, enthusiastic bipartisan agreement on small-business pension reforms, they will not go forward unless the president and Republicans break them free from the political iceberg that is the seven- year balanced budget bill. One way to do that might be to attach the pension provisions to another bill working its way through Congress.

Bill Of Health

Proposed medical savings accounts offer tax relief.

Another section of the vetoed tax-cut bill contains an employee benefit that's nearly as high as pensions on the small-business wish list: medical savings accounts (MSAs).

MSAs ease the burden of health-insurance policies with high deductibles. Employees put a set amount for medical premiums, expenses and deductibles into a savings account. The minimum amount would be $1,500 for an individual and $2,000 for a family, and the maximum would be $3,000 for an individual and $4,000 for a family. This amount is subtracted from the employee's gross income and is not taxable.

Unlike similar types of accounts used by employers, under the proposed legislation, money left over at the end of the year can remain in the account for future medical expenses.