Retirement Plans:What is a SIMPLE IRA?

Suzanna DeBaca -- Expert Business Source, 2/2/2007 8:19:00 AM

Have you been shopping around for the right retirement plan for your business?Does the task seemed filled with paperwork and busy work?If you have less than 100 employees, a SIMPLE IRA might be a good fit.

A SIMPLE IRA is a retirement plan designed especially for small businesses and, true to its name, gives you a simplified way to make contributions toward your own retirement and your employees’ retirement. It has the advantages of being easier and less expensive to set up and administer than some other employer-sponsored retirement plans, such as 401ks.In addition, you may deduct all contributions to your employees’ SIMPLE IRAs on your company’s tax return.

Here are some facts about SIMPLE IRAs:

The company must either generally match employee contributions (dollar for dollar up to 3% of pay) or make a contribution of 2% of pay for all eligible employees.

Contributions are 100% immediately vested.

To sponsor a SIMPLE, a business cannot have more than 100 employees who received at least $5000 pf compensation in the previous year.

Certain notices must be provided annually to eligible employees.

A SIMPLE IRA plan may only be maintained on a calendar-year basis, not on a fiscal year basis.

The employer may deduct all contributions made to its employees' SIMPLE IRAs on its tax return.
Eligible employees are all employees of the employer who received at least $5,000 in compensation from the employer during any 2 preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year
The annual general employee contribution is not the IRA limit of $4000, but $15,5000 (minus other elective deferrals), plus “catch ups” for individuals over the age of 50.

How Do I Set Up A SIMPLE IRA?

You can established a plan by adopting a SIMPLE IRA plan document and setting up SIMPLE IRAs for the eligible employees. There are three basic steps in setting up a SIMPLE IRA plan:

Adoption Agreement:You can establish A SIMPLE IRA by adopting an IRS model SIMPLE IRA plan, using either IRS forms or a prototype SIMPLE IRA plan that has been approved by the IRS. Approved prototype SIMPLE IRA plans are offered by banks, insurance companies, and other qualified financial institutions.
Provide Info to Employees:You must provide eligible employees with certain information about the SIMPLE IRA plan and the SIMPLE IRA where contributions for that employee will be deposited.This must be done each year prior to the employees' election period.This election period is generally 60 days prior to January 1 of a calendar year.
Employee Accounts:A SIMPLE IRA must be set up for each eligible employee. SIMPLE IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SIMPLE IRA is owned and controlled by the employee and the SIMPLE IRA plan contributions are sent to the financial institution where the SIMPLE IRA is maintained.

Suzannade Baca is President of Private Capital Solutions Group, a financial and investment firm in Des Moines, Iowa.She is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 7 Hanover Square, New York, NY10004, (888) 600-4667.Securities products/services and advisory services are offered through PAS, a registered broker/dealer and investment advisor. Private Capital Solutions Group is not an affiliate or subsidiary of PAS.

PAS is a member NASD, SIPC.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.