SIMPLE IRA Plan for Small Businesses and Employees

Retirement Planning made Easy: SIMPLE IRA Plan for Small Businesses

Perhaps you have heard of SIMPLE IRA plan. Not simple (as in easy), but SIMPLE (Savings Incentive Match Plan for Employees of Small Employers). This is a retirement plan that is easy to administer and offers options that are both flexible and substantial. It is generally available to both for-profit and not-for-profit businesses that have less than 100 employees.

Requirements of the SIMPLE IRA Plan:

There are two basic requirements a business must meet to qualify for the SIMPLE IRA Plan:

100 or fewer employees who earned $5,000 or more the previous calendar year
Your business does not offer another retirement plan

A SIMPLE IRA Plan allows your small business to provide you and your employees a way to save for retirement while reducing income taxes. They offer lower start-up costs than other retirement plans and they are easy to operate.

More Advantages of the SIMPLE IRA Plan:

Low start-up and administrative costs
Easy to operate – no requirements to file annual financial reports
Easy to set up through your financial institution
Employees contribute with payroll deductions on a tax-deferred basis
The business owner may match employee contributions or contribute a fixed percentage of all eligible employees’ wages
You may qualify for a tax credit of up to $500 per year for the first 3 years to offset the costs associated with the SIMPLE IRA Plan

Setting up the SIMPLE IRA Plan:

Setting up the SIMPLE IRA plan is simple (as in easy) for small business owners to do. You may choose one financial institution to handle all your employees, or you can allow your employees to choose their own. This is an important decision as the financial institution becomes a trustee to the retirement account.

No matter who makes the choice, the institution must be a bank, mutual fund, insurance company that issues annuity contracts or other financial institutions that are approved by the IRS in order to qualify as a trustee. They must agree to receive and invest contributions and provide the employer with an updated summary description of the plan every year.

Once you have chosen the financial institution, review their SIMPLE IRA plan document and choose a model form or other plan document. There are basically two choices of model forms:

IRS Form 5304-SIMPLE: This is the form you will use if employees are allowed to select the financial institutions that will receive their contributions.
IRS Form 5305-SIMPLE: This is the form to use if you require that all contributions be deposited with a designated financial institution.

Complete and sign the IRS form or plan document. This will be your guide; a legal document that describes your employees’ rights and benefits. It will describe the requirements for your employees to be eligible to contribute to the plan. You can limit the employees covered to include those who earned at least $5,000 during any 2 years prior to the current year and who are expected to receive at least $5,000 during the current year.

How the Plan Works:

You provide information to your financial institution on your employees who are eligible to participate in the plan as described in your plan document. Contributions to the plan are deposited into IRA accounts.

SIMPLE IRA plans operate on a calendar year basis; an employer can set up the plan as late as October 1. A SIMPLE IRA plan is set up for each employee. Employees must receive notice of their right to participate with payroll deductions and employer contributions. Employees must be provided a copy of the plan document and summary description.

Employees can make contributions in any amount as long as they do not exceed the legal limits that are in place during the current tax year. The amount is subject to change every year. The maximum amount was $10,500 for 2008 and is $11,500 for 2009. Employees age 50 or over can make a catch up contribution of up to $2,500 for 2008 and 2009.

Employees can change their contribution levels during the plan’s election period. The election period must be at least 60 days long and extend from November 2 to December 31 each year. In addition to the 60-day election period, a plan can have more election periods during the year.

There are several ways that employer contributions can be determined and employees must receive notification each year before the beginning of the 60-day election period.

Employee contributions must be deposited with the financial institution serving as trustee for the plan within 30 days after the end of the month in which the amounts would have been payable to the employee. Contributions must be made by the due date for filing your business’s Federal income tax return.

The US Department of Labor and the IRS provide additional information on retirement plans on their websites at www.dol.gov/ebsa and www.irs.gov/ep

Michael McGee shares wealth building tips while providing help with financial planning, traditional IRA, self-directed IRA, Roth IRA, SEP IRA, 401-K plans, college funding, 529 college savings plan, tax shelter, investment savings, family savings and financial security for consumers and business owners in Oakland County, Pontiac, Waterford, West Bloomfield, Farmington Hills, Southfield, Royal Oak, Rochester, Troy, Novi, Wayne County, Detroit, Dearborn, Livonia, Redford, Romulus, Westland, Northville, Plymouth, Canton, Trenton, Taylor and neighboring cities and communities.