SIMPLE IRAs for Small Businesses
Salary
Reduction, Less Administration
Like the popular 401(k) Plan, the SIMPLE (Savings Incentive Match
PLan for Employees) IRA
Plan allows small businesses to offer a
tax-advantaged, company-sponsored
retirement plan — without
being solely responsible for
funding the plan. Not only is the SIMPLE
IRA Plan relatively
inexpensive to offer, it’s easy to administer, for
businesses
with 100 or fewer employees.
SIMPLE plans are funded by employer contributions
and
elective employee salary deferrals.
A SIMPLE IRA Plan is a salary reduction retirement
plan. That
simply means that your employees decide how much
they want
to save for retirement — and that amount is
automatically
deducted from their salary each pay period before
federal income
taxes are withheld. These amounts are then contributed
to a
SIMPLE IRA for each participant. While SIMPLE IRA Plans
are
funded in part by employee salary reduction contributions,
they
do require employer contributions.
One of the biggest advantages of a SIMPLE
IRA Plan is that it
enables all participants to save for retirement
while saving on
taxes. In addition to reducing current taxable
income, a SIMPLE
IRA Plan also
 Shifts
some of the funding responsibility to employees
Offers flexible, tax-deductible employer contribution options
Helps retain and attract valuable employees
Allows any earnings to compound tax deferred
Eligible employees can elect to contribute
as much as 100% of
compensation, up to the limit for the plan
year, to their SIMPLE
IRAs before federal income taxes are
withheld. These salary
reduction contributions must be expressed
as a percentage of
each participant’s compensation or
as a specific dollar amount.
Key
Features of a SIMPLE IRA Plan
Below are seven key things small business
owners should know about a SIMPLE IRA
Broad eligibility requirements
Significant tax advantages
Flexible contribution requirements
Self-directed investments
Access to assets
Low cost and minimum administrative requirements
Establishment deadlines
Broad Eligibility Requirements
Which Employers Can Establish a SIMPLE IRA Plan
You may find a SIMPLE IRA Plan particularly
attractive if you are looking for the types of benefits the
popular 401(k) Plan can offer — but without all the administrative
responsibilities. In general, a SIMPLE IRA Plan is available
to any business owner who:
- has
100 or fewer employees who received at least $5,000
in compensation from your company for the preceding
year; and
- is not
currently maintaining another employer sponsored retirement
plan, such as a SEP IRA, Keogh, or 401(k). If you
already have another type of retirement plan for your
business, you can maintain the assets you have in that
plan.
However, if you wish to establish a SIMPLE IRA Plan,
you cannot make any contributions to or accrue benefits
for any other employer-sponsored plan for any year for
which your SIMPLE IRA Plan is maintained.
Once you know that your company can establish
a SIMPLE IRA plan, you need to determine employee eligibility.
Which
Employees Can Contribute to a SIMPLE IRA Plan
The eligibility rules for employee participation
are slightly different than the rules determining company eligibility.
Generally, eligible employees include those who:
- Have
earned at least $5,000 in compensation from your company
in any two preceding years (whether or not consecutive),
and
- Are
reasonably expected to earn $5,000 in compensation
from your company during the current year
While employers cannot make these eligibility
requirements more restrictive, they can generally liberalize
them to include more employees.
For more information, see Frequently
Asked Questions About SIMPLE IRAs.
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Significant Tax Advantages
Contributing to a SIMPLE IRA plan can help
small business owners save on their business taxes as well
as their personal income taxes.
Tax credit
The tax law enacted in 2001 grants a special nonrefundable
tax credit of up to 50% of the first $1,000 of administrative
and retirement education expenses for small businesses for
the first three years of a new plan.
A
non-refundable tax credit may alo be available to individuals
who make pre-tax contributions to a SIMPLE-IRA. The credit
applies to the first $2,000 in contributions. There are certain
eligibility requirements that must be met and the rate of
credit depends on the individuals adjusted gross-income.
Tax-Deductible Contributions
for Employers
Contributing to a SIMPLE IRA Plan can help you save on current
taxes. As an employer, all contributions you make on behalf
of your plan participants are deductible as a business expense.
Tax-Advantaged Contributions
for Participants
Contributing to a SIMPLE IRA Plan will also reduce each participant’s
current federal income taxes. That’s because all salary
reduction SIMPLE IRA contributions are made before federal
income taxes are withheld, thus reducing each participant’s
current federal taxable income. Of course, taxes will be due
upon withdrawal.
Offers tax-deferred
growth
Another tax advantage of saving through a SIMPLE IRA Plan is
that earnings have the opportunity to grow tax deferred until
withdrawn. When your earnings aren’t eroded by taxes
each year, they have the potential to compound faster. Thanks
to this tax-deferred compounding over the long term, you can
earn significantly more in a SIMPLE IRA than you would in a
taxable investment earning the same rate of return.
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Flexible Contribution Requirements
Employee Contributions
Eligible employees can elect to contribute
up to 100% of compensation up to a maximum of $10,500 for 2008 through salary reduction.
(The amount elected by the employee may be expressed as a percentage
of compensation or as a specific dollar amount.)
Additionally,
participants age 50 and older in 2008 may be able
to make an additional annual $2,500 catch-up elective deferral
contribution to their SIMPLE-IRA.
Provides
for flexible employer contribution options
Employers can choose between the two different contribution
methods described below. Employers generally can switch between
these methods each year, as long as certain notification requirements
are met. (Download the contribution
worksheet to help estimate
how much your company may have to contribute to the plan.)
3%
Matching Contribution. Choosing this option
requires a dollar-for-dollar match of each participants' contributions — up
to 3% of compensation each year (not to exceed
$10,500 for 2008). Also allows a match reduction
to as little as 1% of each participant’s
compensation for any two years in a five-year period. Keep
in mind that this method is based on matching each employee's
contributions. So if an employee doesn’t contribute,
the employer does not
contribute either; or
2%
Nonelective Contribution. Requires a 2% contribution
of each eligible employee’s
compensation each year — up to a maximum of $4,500 for 2008-- regardless of whether the
participant contributes or not (the maximum annual compensation
on which contributions can be based is $225,000 for 2008).
To illustrate
the differences between the two methods, look at hypothetical
funding requirements for an employee making $40,000 a year
in the table below. Which contribution method is right for
you depends on your circumstances. If you’re primarily
interested in encouraging employees to save for their retirement,
you may want to consider the Matching Contribution option.
If you’d prefer to use this benefit to reward eligible
employees, you may want the Nonelective Contribution method.
| Comparing
Employer Contribution Methods |
| |
3% Matching
Contribution |
|
2% Non-elective Contribution |
| EXAMPLE
A: The employee contributes 5% of his salary ($40,000)
or $2,000. |
| |
Employer
matches employee’s contribution on a dollar-for-dollar
basis, up to 3% of the employee’s compensation
(3% x $40,000 = $1,200).
Of course, in any two years in a five-year period, the
employer has the flexibility to reduce the match to 1%
of the employee’s compensation
(1% x $40,000 = $400). |
|
Employer contributes
2% of the employee’s compensation
(2% x $40,000 = $800). |
| EXAMPLE
B: The employee contributes 2.5% of his salary ($40,000)
or $1,000. |
| |
Employer
matches employee’s contribution on a dollar-for-dollar
basis, up to 3% of the employee’s compensation.
Since the employee chose to contribute only 2.5% of his
or her compensation (or $1,000), the employer would only
have to match $1000. In any two years in a five-year
period, the employer could reduce the match to 1% or
$400. |
|
Employer contributes
2% of the employee’s compensation
(2% x $40,000 = $800). |
| EXAMPLE
C: The employee decides not to contribute anything. |
| |
The employer
is not required to contribute anything because there’s
no salary reduction contribution for the employer to
match. |
|
The employer is required
to contribute 2% of the employee’s compensation
(2% x $40,000 = $800). |
For more information, see Frequently
Asked Questions About SIMPLE IRAs.
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Self-Directed Investments
All contributions to a SIMPLE IRA Plan are
directed into each participant’s own separate SIMPLE
IRA.
Each participant then makes and executes all
investment decisions within his or her own account.
For more information, see Frequently
Asked Questions About SIMPLE IRAs.
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Access to Assets
All SIMPLE IRA contributions are immediately
100% vested, meaning that your employees are entitled to any
SIMPLE IRA contributions at any time. However, to keep participants
focused on one of the primary reasons you set up the SIMPLE
IRA — to help them save for retirement — distributions
from a SIMPLE IRA in the first two years of participation are
subject to a higher early withdrawal penalty than traditional
IRA distributions. If a participant is under age 59½:
- any withdrawals taken within the first two years of plan
participation generally will be subject to a 25% early
withdrawal penalty; and
- any withdrawals
taken after the first two years are generally subject
to a 10% early withdrawal penalty.
Withdrawals
taken within the first two years of plan participation
are not permitted for purposes of conversion to a Roth
IRA or rollover by transfer to an IRA other than a
SIMPLE IRA.
There are some exceptions to the early withdrawal penalties
summarized above. For example, the early withdrawal
penalties will be waived if the distribution is:
- made due to
death or disability, for qualified expenses such as
a first-time home purchase (lifetime limit up to $10,000),
higher education expenses, health
insurance premiums paid by certain unemployed individuals,
substantially equal periodic payments, and on account
of an IRS levy and certain major medical
expenses in excess of 7.5% of adjusted gross income;or
- rolled over
or transferred to another SIMPLE IRA; or
- rolled over
or transferred to another type of IRA after employee
has participated in the SIMPLE IRA Plan for two years.
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Low Cost and Minimum Administrative Requirements
iNot only is a SIMPLE IRA Plan attractive
to employees, key advantages for an employer are that it is
relatively easy to set up and maintain.
Unlike
a 401(k) Plan, no annual employer plan-level tax filings
are required by the IRS
No
costly “anti-discrimination tests” to perform
each year. (Such tests typically involve complicated
calculations to make sure employer is
not over- contributing for highly compensated employees.)
No
need to track vesting, since all contributions are
immediately 100% vested (which means each employee
owns all SIMPLE IRA assets immediately
and can take these assets with them if leaving the
company.)
For more information, see Frequently
Asked Questions About SIMPLE IRAs.
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Establishment Deadlines
For employers who want to establish a SIMPLE
IRA plan for the current tax year, you must set up the plan
and notify your employees by October 1 of the current tax year.
(An exception applies for businesses which are established
after October 1.)
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** IRA account fees have been eliminated on
Midas Funds' Traditional, Roth, SEP and Rollover IRAs. Fund
expenses and brokerage commissions may still apply. Depending
on your situation, fees may include low-balance fees, short-term
trading fees, and account closing fees. | 
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