A simple new SIMPLE

The deadline for establishing a new SIMPLE IRA plan is October 1.  The Savings Incentive Match Plan for Employees (SIMPLE) was especially designed with ease of administration for small businesses in mind.  The deadline applies only for businesses that have not previously had a SIMPLE IRA plan in place.  For all others, January 1st remains the deadline.

Small businesses, with 100 or fewer employees, may choose to implement a SIMPLE IRA plan.  Like most other qualified retirement plans, annual contribution limits are subject to cost-of-living adjustments.  For 2011, eligible employees may choose to contribute up to $11,500 to the plan through salary reduction contributions. An employee age 50 or older can make a catch-up contribution of up to $2,500 to a SIMPLE in 2011.

Employers must choose between making either a matching contribution or a non-elective contribution to the plan.  For a matching contribution, generally, the employer must match participating employee contributions dollar-for-dollar for up to 3% of the employee’s compensation.  For non-elective contributions, generally, employers must contribute 2% of each eligible employee’s compensation – whether the employee chooses to make salary reduction contributions or not.

Three Steps to Setup a SIMPLE IRA Plan

There are three steps to establishing a SIMPLE IRA plan.

1)       Execute a written agreement to provide benefits to all eligible employees.

The IRS provides a couple of forms that are used to set up a Simple IRA:  Form 5304-SIMPLE or Form 5305-SIMPLE.   Form 5304-SIMPLE is used to allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions.  Form 5305-SIMPLE is used if the employer will deposit all SIMPLE IRA plan contributions at an employer-designated financial institution.

Alternatively, you may contact a mutual fund, insurance company, bank or other qualified institution that will provide a prototype document to facilitate the process.  You may also have an individually designed plan.

2)      Give employees certain information about the agreement.

Employees must be notified before the beginning of the election period of:

  • The employee’s opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
  • The employees’ ability to select a financial institution that will serve as trustee of the employees’ SIMPLE IRA, if applicable;
  • The employer’s choice to make either matching contributions or non-elective contributions;
  • A summary description (the financial institution should provide this information); and
  • Written notice that the employee can transfer balances without cost or penalty if using a designated financial institution.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31). However, the dates of this period are modified when a plan is set up in mid-year or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.

When setting up a SIMPLE IRA plan using either Form 5304-SIMPLE or Form 5305-SIMPLE, providing each employee with a copy of the signed forms satisfies the notification requirement.

3)      Set up an IRA account for each employee .

A SIMPLE IRA must be set up by or for each eligible employee and all contributions to the plan must go to it.

Financial institutions authorized to hold and invest SIMPLE IRA plan contributions include banks, savings and loan associations, insurance companies, certain regulated investment companies, federally-insured credit unions and brokerage firms. SIMPLE IRA plan contributions can be put into stocks, mutual funds and other similar types of investments.   Take note of the investment options that are available at each institution considered.  This will determine what kinds of investment choices are available to the employee as he or she makes decisions about investing his or her SIMPLE IRA accounts.

the financial institutions investing your SIMPLE IRA plan contributions will provide statements to both employer and employee both at the time of the first SIMPLE IRA plan contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SIMPLE IRA assets.

After the plan is in place

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. 

The employer may deduct all contributions made to its employees’ SIMPLE IRAs on its tax return.

Small businesses that want to help employees with their retirement planning, while reaping potential tax benefits, may find the SIMPLE IRA a good choice.  Please feel free to contact Mackey Advisors, to discuss how a SIMPLE IRA fits into your plans for your business.

We are a Wealth Advocacy firm dedicated to one thing, Empowering Confident Action. Clients call us trusted advisors, cheerleaders, wisdom purveyors, financial therapists, sounding boards. Call us whatever you like, we are passionate about the achievement of your wealth and prosperity goals.

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