SIMPLE IRA Plans at a Glance
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Open to businesses with 100 or fewer employees that do not maintain another retirement plan
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Easy and inexpensive to operate
-
No discrimination testing required
-
Employer contributions are mandatory
-
Employees have the option of salary deferrals
-
Lower contribution limits than some other retirement plans
It can be SIMPLE to Start a Small Business Retirement Plan
If your small business has wanted to offer a retirement plan to your employees and you have been concerned about complex regulations, high costs or difficult administrative requirements, then a SIMPLE IRA might be right for you.
SIMPLE – which stands for Savings Incentive Match Plan for Employees – is a salary-reduction plan available only to employers with 100 or fewer employees that currently do not maintain another retirement plan. SIMPLE IRA plans essentially offer easier and less expensive administration in return for lower annual contribution limits. For example, they are exempt from discrimination and top-heavy testing that can cause headaches for plans, such as traditional 401 (k) plans. The tradeoff is that they are also less flexible and you may not be able to save as much for retirement.
GREATER EMPLOYEE CONTROL
In a SIMPLE IRA, employer contributions and employee deferrals are made directly into individual employees’ individual Retirement Accounts. As a result, the funds are entirely portable by employees: they own and have complete control of their accounts. Employees are immediately 100 percent vested.
All employees earning $5,000 for either of the past two years and expected to earn at least $5,000 in the current year are eligible to participate in a SIMPLE IRA.
FUNDING
Generally, a SIMPLE IRA is funded through a mix of optional employee deferrals and mandatory employer contributions. In 2009 the SIMPLE deferral limit is $11,500 with an additional catch up limit of $2,500 for participants 50 years and older.
Employers, in turn, are required to make contributions in one of two ways:
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They can match employee contributions up to 3 percent of the employee’s compensation. If this method is chosen, the employer has the option to reduce the match amount to as little as 1 percent in two of five years.
-
They can contribute 2 percent of compensation to all eligible employees, whether or not they participate in the plan.
As with other plans, employer contributions are tax-deductible.
Setting Up a SIMPLE IRA
Companies that previously did not maintain a SIMPLE IRA can set one up any time
between January 1 and October 1. If you previously maintained a SIMPLE IRA plan, you may set one up to be effective only on January l.
A SIMPLE IRA plan can be established by adopting an IRS model using either Form 5305-SIMPLE (if contributions are deposited at a designated financial institution) or Form 5304-SIMPLE (if employees can choose the financial institution for receiving contributions). A SIMPLE IRA account must also be set up for each eligible employee, using either IRS model Form 5305-S (a trust account) or Form 5305-SA (a custodial account).
You also must provide each eligible employee with annual information about the plan provisions and employer contribution levels, including any plan changes. This notice must be made 60 days before the start of the next calendar year, or by November 2.
Selecting the right retirement plan is an important business decision and we would be happy to help you learn more about SIMPLE IRA plans and whether they are an appropriate solution for your business. Contact us for more information.
SIMPLE IRA Plans at a Glance
-
Open to businesses with 100 or fewer employees that do not maintain another retirement plan
-
Easy and inexpensive to operate
-
No discrimination testing required
-
Employer contributions are mandatory
-
Employees have the option of salary deferrals
-
Lower contribution limits than some other retirement plans
It can be SIMPLE to Start a Small Business Retirement Plan
If your small business has wanted to offer a retirement plan to your employees and you have been concerned about complex regulations, high costs or difficult administrative requirements, then a SIMPLE IRA might be right for you.
SIMPLE – which stands for Savings Incentive Match Plan for Employees – is a salary-reduction plan available only to employers with 100 or fewer employees that currently do not maintain another retirement plan. SIMPLE IRA plans essentially offer easier and less expensive administration in return for lower annual contribution limits. For example, they are exempt from discrimination and top-heavy testing that can cause headaches for plans, such as traditional 401 (k) plans. The tradeoff is that they are also less flexible and you may not be able to save as much for retirement.
GREATER EMPLOYEE CONTROL
In a SIMPLE IRA, employer contributions and employee deferrals are made directly into individual employees’ individual Retirement Accounts. As a result, the funds are entirely portable by employees: they own and have complete control of their accounts. Employees are immediately 100 percent vested.
All employees earning $5,000 for either of the past two years and expected to earn at least $5,000 in the current year are eligible to participate in a SIMPLE IRA.
FUNDING
Generally, a SIMPLE IRA is funded through a mix of optional employee deferrals and mandatory employer contributions. In 2009 the SIMPLE deferral limit is $11,500 with an additional catch up limit of $2,500 for participants 50 years and older.
Employers, in turn, are required to make contributions in one of two ways:
-
They can match employee contributions up to 3 percent of the employee’s compensation. If this method is chosen, the employer has the option to reduce the match amount to as little as 1 percent in two of five years.
-
They can contribute 2 percent of compensation to all eligible employees, whether or not they participate in the plan.
As with other plans, employer contributions are tax-deductible.
Setting Up a SIMPLE IRA
Companies that previously did not maintain a SIMPLE IRA can set one up any time
between January 1 and October 1. If you previously maintained a SIMPLE IRA plan, you may set one up to be effective only on January l.
A SIMPLE IRA plan can be established by adopting an IRS model using either Form 5305-SIMPLE (if contributions are deposited at a designated financial institution) or Form 5304-SIMPLE (if employees can choose the financial institution for receiving contributions). A SIMPLE IRA account must also be set up for each eligible employee, using either IRS model Form 5305-S (a trust account) or Form 5305-SA (a custodial account).
You also must provide each eligible employee with annual information about the plan provisions and employer contribution levels, including any plan changes. This notice must be made 60 days before the start of the next calendar year, or by November 2.
Selecting the right retirement plan is an important business decision and we would be happy to help you learn more about SIMPLE IRA plans and whether they are an appropriate solution for your business. Contact us for more information.