SIMPLE Retirement Plan: IRA Version

The SIMPLE Individual Retirement Account plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under this retirement plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity set up for each employee. This type of retirement plans (SIMPLE IRA) is maintained on a calendar-year basis. See IRS Publication 560, IRS Publication 590 and IRS Notice 98-4 for detailed information on this type of retirement plans.

The IRA-type SIMPLE retirement plan provides you and your employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. And compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs … they are just simpler to operate.

Other Advantages of a SIMPLE Retirement Plan IRA version:

· SIMPLE IRA plans are easy to set up and run – your financial institution handles most of the details.

· Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.

· You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.

· You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting a SIMPLE IRA plan. (IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs).

· Administrative costs are low.

· You are not required to file annual financial reports.

Actually, this retirement plan is much less burdensome for an employer than other types of retirement plans. For example, the employer has no requirement to make annual filings to the IRS. Employers with other types of retirement plans must file Form 5500 each year.

The employer must provide a description of the retirement plan to employees but it is a much simpler format than the Summary Plan Description required of other types of qualified retirement plans. The SIMPLE summary description includes the name and address of the employer, eligibility requirements for employees, a description of the benefits provided, the time and method of collecting contributions, and the procedures and effects of withdrawals from the plan including rollovers. A one or two-page summary should be sufficient to meet this requirement as compared to the detailed summary plan descriptions that are often needed for other qualified retirement plans.

The other information that must be provided to an employee is the election form at least 60 days in advance of the year and an annual statement of accounts within 30 days after the end of the year.

The employer is also responsible for applying the proper tax treatment on employee and employer contributions. Employee contributions are not subject to income tax withholding but are subject to social security (FICA) taxes.

The employer must observe the $150,000 (indexed) limit on the compensation that can be considered in the plan as required for other qualified retirement plans.

The IRA-time SIMPLE retirement plans also give the employer some flexibility in making the contribution. For example, the 100% match on the first 3% of employee contributions can be reduced to a 100% match on the first 2% or 1% of pay the employee contributes. This limit, however, cannot be used any more frequently than two years out of five. For example, an employer might match employee contributions of up to 3% for the first year, reduce the match to only 1% for the next two years, and revert to matching up to 3% for the following two years.

The employer also has the option of making a uniform 2% of pay contribution for all employees eligible for the retirement plan whether or not they contribute, in lieu of the matching contribution. Depending on how many employees elect to participate and the percentage of pay they choose to contribute, the 2% uniform contribution may be more or less expensive than the matching contribution. The matching contribution, however, provides more incentive for employees to save their own money towards retirement on a tax-efficient basis.