Firms with fewer than 100 employees can establish what's called a SIMPLE plan, short for "savings incentive match plan for employees."

The company sets a percentage of each employee's pay that can be contributed to the plan, up to a maximum yearly amount determined by IRS Pension Plan Limits per employee. The employee chooses where the money goes, just as in a conventional 401(k).

In exchange for the simplicity of the plan, the employer must agree to contribute to workers' accounts, matching up to 3% of pay contributed to the plan, or, at a minimum, 2% of everyone's pay, even those who don't participate in the plan themselves.

Workers are vested immediately in the employer's contributions. All contributions -- the workers' and the company's -- grow tax-deferred as long as they remain in the account.

The SIMPLE 401(k) is a nice cross between an IRA and a 401(k). It allows a smaller maximum annual contribution than a conventional 401(k) but more than twice the limit of an IRA. Rules governing the plan are essentially the same as for a 401(k), with the exception that bailing out within the first two years of joining the plan raises the 10% early-withdrawal penalty to a whopping 25%.

Next: Employee Stock Ownership Plans and Profit-Sharing Plans

MORE: Kiplinger.com | The Basics of Money | Getting Started

TOOLS:   E-Mail Article  |  Print Article  |  Reprint Article  |  Content Sales

E-MAIL ALERTS: Keep up-to-date with the latest Kiplinger has to offer

SAVE, SHARE & DISCUSS:    |   |   |   |   |   |   |   |   

ADD HEADLINES: