Are you thinking about starting a retirement plan for your business? Take a look at a SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA. A SIMPLE IRA is a straightforward tax-favored retirement plan for businesses that meet two basic criteria. You must have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year) and you cannot currently have another retirement plan offered by your business.
There are many ways that your business and your employees can benefit by you providing a SIMPLE IRA plan. The plan will reduce taxes, and, give you a better opportunity to retain your quality employees that are concerned with saving for their retirement. Two added bonuses, for you, as the business owner, are that SIMPLE IRA plans offer lower initial and annual costs than other types of retirement plans and are easier to operate.
Other Advantages of a SIMPLE IRA plan:
- Employees can contribute, on a tax-deferred basis, through payroll deductions
- Employees may decide to cancel the deductions at any time without penalty
- You may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan. (IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs)
- You are not required to file annual financial reports [i]
Here’s how SIMPLEs work.
- Set up. You select a bank, mutual fund, or other approved financial institution to maintain your plan. Establishing your SIMPLE means completing a “model plan document” — generally an IRS form that spells out the terms of your plan, such as the definition of eligible employees and how contributions can be made. You keep the form with your other business legal papers.
- Reporting requirements. Your reporting requirements to the IRS are minimal. There are no annual forms for the SIMPLE. You only have to report information such as an employee’s contributions on each contributing employee’s Form W-2. Once a year, you’ll need to provide your employees with information statements that includes a description of how the SIMPLE works, whether your employees are eligible to contribute, how they can start or change their contributions, and the procedure for, and consequences of, withdrawals and rollovers (including penalties that could be associated with early withdrawals). In addition, employers need to provide an annual election notice informing employees with their right to make salary reduction contributions and the employer’s decision to match or make non-elective contributions for the following plan year.
- Fixing mistakes. If you make a mistake in the administration of your SIMPLE, such as accidentally forgetting to include an eligible employee, the fix could be as easy as taking corrective action to bring the employee into the plan.
- Terminating your plan. To end your SIMPLE, you need to notify your employees and your financial institution. You’ll have to leave the plan open for the entire calendar year and fund the contributions as you stated you would in the annual reporting requirement that you gave your employees. No notification to the IRS is necessary.
Give us a call if you’re ready to establish a retirement plan for your business. We’ll help you examine your options and choose the plan that works best for you.