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.