SIMPLE IRA: THE BEST LITTLE RETIREMENT PLAN FOR A SMALL BUSINESS WITH EMPLOYEES.

The Small Business Job Protection Act of August 20, 1996 established a simplified tax-favored retirement plan for employers with less than 100 employees. When it was made effective January 1, 1997, companies that qualified could elect to offer Savings Incentive Match Plans for their Employees (SIMPLE plans) in one of two forms: the SIMPLE IRA or the SIMPLE 401(k). This brochure limits its scope to the SIMPLE IRA and its usefulness as a primary retirement planning tool for qualified employers.

So many advantages
Unlike traditional 401(k) plans, SIMPLE IRA’s avoid all discrimination tests, trust accounting, qualified plan reporting requirements, and 5500 filings. The elimination of the administrative tasks means that a third-party plan administrator is not necessary, thus eliminating the burdensome administrative fees common to traditional qualified plans. Other advantages to consider include:

  • Elective deferrals of up to $10,500 per employee without percentage of pay
    limitations;
  • Employers may contribute using a matching formula (100% match up to 3% for
    elective referrals) or a non-elective contribution (2% of salary for everyone
    regardless of elective deferral participation);
  • Employers need only offer the plan to employees who have had at least $5,000 in
    compensation during any two preceding years and who are reasonably expected to
    receive that much compensation in the current year.

For example
Consider one example that I will give you of a small business owner with three employees and with the following payroll statistics:

simpleIRA table_fill

If all employees, excluding the owner, elect to defer at least 3% of their salaries, the employer must match 100%, or $54,000 of gross employee pay X .03 = $1,620 in at least three out of five years. In two years in every five year period, the employer could match 100% of up to as little as 1% of pay, or $540.

Alternatively, the employer could elect a straight 2% of pay non-elective contribution, that is, a contribution to all eligible employees irrespective of their elective deferral participation. For example, at 2%, the employer would have to contribute $54,000 X .02 = $1,080 in at least three out of five years with the same two-year funding reduction available as in the matching plan.

Determining the net cost to the employer is simple. All one must do is figure out 3% of the gross pay of all eligible employees.

And the Employer?
The benefits to the employer in the above example would include:

  • a maximum elective deferral of $10,500;
  • and in the case of a matching contribution, a match of $3000 ($100,000 X .03);
  • no administrative headache, the complexities of a 401k are reduced to a payroll function;
  • surprisingly, you reward the employees that truly care about the business;
  • no more playing banker, there are no loans in an IRA, just taxable distributions.

By combining the elective deferral and the matching contribution, the employer would be able to defer $13,500 for his SIMPLE IRA at a deductible cost for employee funding of $1,620. The $1,620 maximum funding exposure would compare favorably with the administrative costs associated with the more complex traditional plans including 401(k)’s, conventional profit sharing, and money purchase pension plans.

Also, if a participant is age 50 or older, the participant may contribute an additional $2,500, bringing the total maximum contribution to $16,000.

*Working spouses of employers may also contribute to SIMPLE IRA’s to a maximum of $10,500 and are entitled to matching or non-elective contributions. For many family-operated businesses, this provides additional retirement planning funding opportunities.

Lastly, we have terminated profit sharing plans and 401(k) plans for businesses and established SIMPLE IRAs instead. The employers have been ecstatic about the SIMPLE IRA over the 401(k).
For additional information on this topic, email info@callawayfinancial.com.

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