Known as Simple, The Simple Plan.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is an employer sponsored plan where plan contributions are made to a participating employee’s IRA for employers who want employees to share in the cost of retirement. The SIMPLE IRA is for businesses and non-profit corporations including Government Agencies.
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A SIMPLE IRA plan.
A SIMPLE IRA plan is an Individual Retirement Account (IRA) based plan that gives small employers a simplified method to make contributions toward their employees’ retirement and their own. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-selective contributions. All contributions are made directly into an IRA.
The 8 SIMPLE IRA Advantages & Rules Discussed in this Article are as follows:
- Salary reduction agreement allows a business with fewer than 100 employees to make 1) matching or 2) non-elective contributions.
- Allows employees to defer a portion of their salary.
- Administration costs are low.
- No government reporting is required by employer.
- Contributions are immediately 100% vested.
- Employees can contribute 100% of earned income up to $10,500 (for 2007).
- Employees direct their own investments.
- Catch-up contributions are permitted.
Employer Disadvantages:
- An eligible employer is not allowed to maintain another retirement plan in addition to or in conjunction with a SIMPLE IRA plan in the same plan year.
- Limited flexibility for mandatory employer contributions.
- Employer is required to make a contribution each year.
- Lower contribution levels than other plans.
- Employer can not establish a vesting plan.
- Loans are not permitted.
- Special restrictions apply to SIMPLE IRA rollovers.
Opening a SIMPlE IRA.
Opening a SIMPLE IRA is not as easy as it should be; most investment firms have the required paperwork. Some institutions have up to 50 pages of documents for the employer and each employee. They also have special instructions on how to deposit the funds. Other SIMPLE IRA investment firms seem to be very easy to work with. SIMPLE IRA’s are available in self-directed accounts or with a professional, but with the complexity of rules I would select a knowledgeable professional especially on the larger plan.
You can invest your Simple IRA in most investments – with money managers, stocks, bonds, mutual funds, or even CDs.
Establish a SIMPLE IRA plan.
There are three basic steps in setting up a SIMPLE IRA plan, all of which must be satisfied:
- Require contributions to be deposited at a designated financial institution at least initially.
- You must provide each eligible employee with certain information about the SIMPLE IRA plan and where the SIMPLE IRA contributions for that employee will be deposited. The information must be provided each year prior to the employee’s election period. Generally, the election period is 60 days prior to January 1 of a calendar year.
- A SIMPLE IRA must be set up for each eligible employee.
Contribution to a SIMPLE IRA.
For 2009, the maximum annual amount of salary reduction for any employee under a SIMPLE IRA plan is $11,500 (the catch-up contribution for employees over 50 years old is an additional $2,500).
Eligible Employee for a SIMPLE IRA.
SIMPLE IRA plans may be established only by employers that have fewer than 100 employees. For purposes of the 100 employee limitation, all employees employed at any time during the calendar year are taken into account, regardless of whether they are eligible to participate in the SIMPLE IRA plan. The employee has to earn $5,000 or more in compensation during the preceding calendar year to be eligible.
You may exclude the following employees in a SIMPLE IRA:
- Employees who are covered in a labor union.
- Covered by Railway Labor Act.
- Employees who are nonresident aliens and who received no earned income.
SIMPLE IRA Contribution Limits.
You have to choose one method:
- Matching Method: The employer may make a contribution (only) if the participant makes a salary reduction contribution.
- Non-Elective Method: With this solution the employer must make an equal 2% contribution for (every) employee for the entire calendar year.
Matching Method.
Many companies prefer the matching method. Many companies with younger employees will not want to use the matching to reduce cost. The younger employees often elect not to contribute in the matching program. It must be offered to all employees, but the reality is many matching plans have low to very low enrollment. In many cases the few employees that enroll into the matching plan appear to be the most loyal long term employees. The loyal long term employees are possibly the employees you would want to reward.
If the employer elects the Matching Method #1, companies must contribute an amount equal to the employee’s salary reduction contribution up to a limit of 3% of the employee’s total compensation for the entire calendar year. This amount may be reduced below 3% in any two of every five years, but it may never fall below 1%. If the employer chooses to make a lower matching contribution, all employees must be notified.
Non-Elective Method.
This is the broad base higher cost alternative retirement program. It requires a nonselective contribution of 2% of the employee’s compensation. An account must be opened for all eligible employees whether or not the employee elects to make a salary reduction contribution.
An employer may substitute the 2% non-selective contribution for the matching contribution for a year, only if:
- Eligible employees are notified that a 2% non-selective contribution will be made instead of a matching contribution.
- This notice is provided within a reasonable period of time before the 60-day election period during which employees can enter into salary reduction agreements.
2 Year Rule before rolling into an IRA.
During the 2-year period, money in a SIMPLE IRA may be transferred to another SIMPLE IRA in a tax-free trustee-to-trustee transfer. If, during this 2-year period, money is transferred from a SIMPLE IRA directly into an IRA the penalty will be increased from 10 percent to 25 percent.
After the expiration of the 2-year period, a SIMPLE IRA may be transferred into an IRA.
Early SIMPLE IRA Withdrawal.
Withdrawals from the SIMPLE IRA plan are subject to additional tax penalties of 25% during the first two years, and the status quo of 10% thereafter.
Accounting for a SIMPLE IRA is very important.
Since the SIMPLE IRA doesn’t have a plan administrator, you’re expected to know the cost basis of the contributions, any conversions, and earnings when you take your SIMPLE IRA distributions. Most brokerage systems and mutual funds appeared to be limited in this field. If you do not have an excellent record keeping system then I would use a money manager. Select one that has the ability to track and account for every penny and any account entry. This service should be provided by a high level of software.
Restrictions and Penalties for a SIMPLE IRA.
An employee may participate in a SIMPLE IRA plan even if he or she also participates in a plan of a different employer for the same year. However, the employee’s salary reduction contributions are subject to limitations.
An employer that establishes a SIMPLE IRA plan is not responsible for monitoring compliance with either of these limitations.
Tax Deadlines for a SIMPLE IRA plan.
You can set up a SIMPLE IRA plan effective on any date between January 1 and October 1, provided you did not previously maintain a SIMPLE IRA plan. If you previously maintained a SIMPLE IRA plan, you may set up a SIMPLE IRA plan effective only on January 1.
When can you terminate a SIMPLE IRA plan?
Other than initial establishment, SIMPLE IRA plans are maintained, or not maintained, on a whole-calendar-year basis. Once started for a year, a SIMPLE IRA plan must continue for the entire calendar year, funding all contributions promised in the employee notice. An employer may terminate a SIMPLE IRA plan prospectively beginning with the next calendar year, after the employer has informed employees that there will be no SIMPLE IRA plan for the upcoming year.
If in 2009 an employer decides to terminate its SIMPLE IRA plan as soon as possible, the employer must inform employees within a reasonable period of time before the 60-day election period ending on December 31, 2009 that there will be no SIMPLE IRA plan for 2010. For 2010, the employer may establish and maintain another kind of qualified plan for its employees and, if this other qualified plan is not operative in 2008, the employer can re-establish a SIMPLE IRA plan for 2008.
Cost for a SIMPLE IRA plan.
The cost for a SIMPLE IRA plan is far lower than a traditional 401k. A SIMPLE IRA plan cost can swing wildly from a basic plan from $350 or $25 per participant to completely no cost. A good solution often is a very flexible plan with a zero cost depending on the services.
The cost of investment services, and their many associated fees, including but not limited to trading cost, yearly maintenance, termination, and transferring fees should be calculated into your total cost of ownership. A good trading service with a true flat fee per trade, plus a few if any additional fees, is about $8 per trade.
The Cost Advantages using Money Managers in a SIMPLE IRA.
With a professional money manager you could have the management fees paid outside the SIMPLE IRA, allowing for more growth of the retirement investments tax free. These options are not available for Mutual Funds, commission brokers or Exchange Traded Funds (ETF). If the management fees are charged outside of the SIMPLE IRA then the fees could become a substantial tax deductible expense, giving money managers a lower cost advantage.
Success with a SIMPLE IRA plan is achieved with planning.
My experience has enlightened me that over time a well maintained and properly invested retirement account can often become a very rewarding program for companies and a properly designed investment account often becomes the owner’s biggest asset outside of their business. The employees, of course, like the additional benefits whether they elect to choose it or not.
SIMPLE IRA
Have a wonderful retirement.
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