As a result of the Tax Reform Act of 1996, a new and improved retirement plan has been created for eligible employers. The employer under the simple retirement plan does not have to meet most nondiscrimination rules, top heavy plan requirements and has a simplified retirement reporting. An eligible employer is defined as an employer who has one hundred or fewer employees who received at least $5,000 compensation from that employer in the prior year, or does not maintain any other type employer sponsored retirement plan.

The simple retirement plan is simply a written arrangement between the employer and the employee which is in the form of a salary reduction amount which must be expressed as a percentage and may not exceed $6,000 indexed yearly with a minimum increase of $500 beginning in 1998. For small employers, this would allow the taxpayer and their spouse to contribute a maximum of $12,000 if both the taxpayer and spouse earn compensation in the amount of $6,000 each. Unlike other retirement plans, the maximum contribution that is absolutely required by the employer would be 3% of the eligible compensation of other employees. Again, eligible employees are employees who earned $5,000 or more in the preceding tax year. Therefore, most small employers can take substantial deduction for owner employees at a minimal out-of-pocket cost to the employer.

If you have more questions on these tax savings plans and other tax savings plans created by the Tax Reform Act of 1996, please give our office a call.