Which statement regarding a SIMPLE plan is CORRECT?

Which statement regarding a SIMPLE plan is CORRECT?

• A. The maximum annual elective deferral contribution to a SIMPLE 401(k) is $20,500 for an employee under age 50.
• B. A SIMPLE requires ADP testing of employee elective deferral contributions.
• C. A 25% early withdrawal penalty may apply within the first two years of participation.
• D. SIMPLE IRAs are subject to top-heavy rules.

Answer: (C)

The statement regarding the 25% early withdrawal penalty potentially applying within the first two years of participation in a SIMPLE plan is correct. Under the rules governing SIMPLE plans, if an employee withdraws funds from their SIMPLE IRA within the first two years of participation, a higher penalty rate applies. Specifically, the penalty for early withdrawal is 25% instead of the standard 10% that applies to other retirement accounts. This serves as a deterrent to early withdrawals and encourages long-term saving in the plan. The other statements do not accurately reflect the characteristics of SIMPLE plans. For example, while elective deferral contribution limits for SIMPLE IRAs and SIMPLE 401(k) plans are set, the context in which they apply varies, and the maximum elective deferral for SIMPLE 401(k) plans often changes each year to adjust for inflation. SIMPLE plans are designed to be easier to administer than other plans and do not require ADP testing, which assesses the contributions of highly compensated employees versus those of non-highly compensated employees. Additionally, SIMPLE IRAs are not subject to top-heavy rules, which typically apply to other qualified plans but not SIMPLE plans specifically.

The statement regarding the 25% early withdrawal penalty potentially applying within the first two years of participation in a SIMPLE plan is correct. Under the rules governing SIMPLE plans, if an employee withdraws funds from their SIMPLE IRA within the first two years of participation, a higher penalty rate applies. Specifically, the penalty for early withdrawal is 25% instead of the standard 10% that applies to other retirement accounts. This serves as a deterrent to early withdrawals and encourages long-term saving in the plan.

The other statements do not accurately reflect the characteristics of SIMPLE plans. For example, while elective deferral contribution limits for SIMPLE IRAs and SIMPLE 401(k) plans are set, the context in which they apply varies, and the maximum elective deferral for SIMPLE 401(k) plans often changes each year to adjust for inflation. SIMPLE plans are designed to be easier to administer than other plans and do not require ADP testing, which assesses the contributions of highly compensated employees versus those of non-highly compensated employees. Additionally, SIMPLE IRAs are not subject to top-heavy rules, which typically apply to other qualified plans but not SIMPLE plans specifically.