Knowing the right kind of retirement plan that is right for your company can be vital to your employees and your retirement. You want to make sure that if you’re offering benefits, that it’s not hurting your company, whether it be from cost or contribution amounts. A Savings Incentive Match Plan for Employees (SIMPLE-IRA) is a great way for employers and employees of a small business to contribute to a retirement plan. They can provide a significant source of income in retirement if set up and funded properly.
To offer a SIMPLE-IRA, you must have 100 or fewer employees and either adopt Form 5304-SIMPLE or 5305-SIMPLE. These two forms differentiate prototypes and individually designed plans. There are no filing requirements, but the employer can only offer the SIMPLE-IRA, no other retirement plan. Each year the employer is required to make a matching contribution up to 3% or a 2% non-elective deferral for every eligible employee. If non-elective deferral is selected, you must contribute to every employee even if the employee does not contribute to their plan. Employees are able to contribute and even employer contributions are vested.
A SIMPLE-IRA can start anytime between January 1st and October 1st, as long as you didn’t previously maintain a SIMPLE- IRA. If you did your plan can only be effective for January 1st. If you are a new business, you may start a plan after October 1st, but it must be done as soon as it’s administratively feasible.
An employee or self-employed person who earned at least $5,000 in compensation during any two years before the current calendar year and expects to earn at least $5,000 for the current year will be eligible to participate. Rules cannot be made to be stricter for the participants, but they can be relaxed. For instance, you could decrease the amounts for annual compensation, but you cannot increase the compensation minimum.
In 2023, you can contribute up to $15,500 in elective deferrals per year, with employees who are age 50 or older can contribute an extra $3,500. As stated earlier the employer must either match the employee’s elective deferrals up to 3% of the annual compensation or 2% of every eligible employee regardless of whether or not that employee is contributing to the plan. The employer may lower the contribution limit to a lower percentage, but it cannot be lower than 1% and can only be done 2 out of 5 years.
A SIMPLE-IRA may or may not be good for your company. They are, however a fairly simple plan to maintain. Before you start any plan, do your research, speak to professionals.