Business Strategies

Many small business owners want to offer a retirement benefit but are put off by the cost and paperwork of a full 401(k). The SIMPLE IRA plan, short for Savings Incentive Match Plan for Employees, was designed for exactly that situation.

How it works

A SIMPLE IRA is set up through a financial institution, and each eligible employee has an IRA of their own. Employees can choose to defer part of their pay into the account, and the employer is required to contribute, either by matching employee contributions up to a percentage of pay or by making a fixed contribution for all eligible employees. The employer must pick one of those methods and tell employees each year.

Who can set one up

The plan is generally available to employers with a limited number of employees, and it can generally not be offered alongside another retirement plan for the same employees. Self-employed people with no employees can also use it. The size limit and other eligibility details are set by the IRS, so confirm them at irs.gov.

Benefits for the business owner

• Low administrative burden: no annual testing for discrimination, and generally simpler filing than a 401(k).
• Low cost: setup and fees are typically modest.
• Tax deduction: employer contributions are generally deductible as a business expense.
• Employee appeal: a plan with employer contributions helps with recruiting and keeping people.
• Owner participation: owners can defer pay and receive employer contributions too.

Benefits for employees

Employees can defer part of their pay on a pre-tax basis and receive the employer contribution. Their balances belong to them immediately, with no vesting schedule. The account can be rolled over like other IRAs.

Drawbacks to consider

• Contribution limits are lower than in a 401(k) plan, though catch-up contributions are available for older participants.
• Employer contributions are mandatory each year.
• Early withdrawals during the first two years of participation can face a higher additional tax than a regular IRA.
• Loans are not available from SIMPLE IRAs.
• There is no vesting schedule to help retain employees.

Setting it up

You adopt the plan by completing an IRS form with a financial institution, notify employees ahead of each year's enrollment period, and deposit contributions on time. There are deadlines for establishing the plan and for deposits, so work with your CPA and the plan provider to meet them.

Alternatives

Other options include a SEP IRA, a traditional or solo 401(k), and a payroll-based plan. The right choice depends on your size, your cash flow and how much you want to put away yourself.

We can help you compare the options and handle the tax side. See our business tax services or contact us to discuss a plan for your company.