Do you own your own business? Do you want to provide retirement plan benefits for your employees but are concerned about the time, expense, and complexity of managing the plan? There is a low-cost solution available that allows you to establish a retirement plan quickly and easily: a SIMPLE IRA plan.
S-I-M-P-L-E stands for Savings Incentive Match Plan for Employees of Small Employers. A SIMPLE IRA plan is like a 401(k) plan in that employees may set aside a portion of their salary for retirement on a tax-deferred basis. But SIMPLE IRA plans do not have complex administration rules or expensive recordkeeping requirements like other retirement plans.
SIMPLE IRA plans are easy to establish and maintain. Once you sign the plan document and notify your employees about the plan, your primary responsibilities will be depositing their salary contributions, providing an annual notice, and making employer contributions each year.
In addition to helping you and your employees save for retirement, your business can benefit from a tax credit for starting the plan and tax deductions for making contributions into the plan.
Here’s what you need to know about SIMPLE IRA plans.
Employer Eligibility
Any type of business or governmental entity may sponsor a SIMPLE IRA plan, so long as the business does not have more than 100 employees who earned more than $5,000 in the preceding year. Also, you generally cannot have offered another retirement plan during the same calendar year that you have a SIMPLE IRA.
Employee Eligibility
You can choose to only allow employees into the plan who:
- Have earned at least $5,000 from your business during any two preceding calendar years, and
- Are reasonably expected to earn at least $5,000 during the current year.
Contributions
For 2020, an eligible employee may defer up to $13,500 of their compensation into a SIMPLE IRA. If an employee is age 50 or older, they may defer an additional $3,000 each year as a catch-up contribution.
In exchange for the administrative simplicity of the plan, the employer is required to contribute to employees’ SIMPLE IRAs each year. You can choose from one of two types of contribution to make each year:
- For each employee who defers compensation into the plan, you make a dollar-for-dollar matching contribution of up to 3% of the employee’s compensation. (You may choose to reduce the match to as low as 1% of compensation for any two years out of a five-year period.)
- For all eligible employees, even those who choose not to contribute to the plan, you make a contribution equal to 2% of the employee’s compensation.
When you decide which type of contribution you’ll be giving for the coming year, you must provide a notice to your employees and give them a chance to make or change their salary deferral election for the coming year. This notice must be provided by November 1 each year.
Each employee, including you, will need to open a SIMPLE IRA to receive the plan contributions. Once the contributions are deposited into the IRA, each employee is in control of selecting their own investments.
Establishing a SIMPLE IRA Plan
To establish a SIMPLE IRA plan, you must sign an employer-level plan document, which you can obtain from an IRA custodian like Mainstar Trust. You will need to provide information about the SIMPLE IRA plan to your employees and ensure that each eligible employee establishes their own SIMPLE IRA with a custodian of their choice.
To have a SIMPLE IRA plan effective for 2020, you generally must establish the plan by October 1. At this time of year, most employers establish a plan that will be effective as of January 1 of the coming year. This will give you time to execute the plan documents and provide notice to your employees, and it will give them time to make an election and open a SIMPLE IRA before the first payroll in 2021.
Tax Credits
A tax credit to help small employers offset start-up costs for establishing a retirement plan has recently been increased from $500 per year to up to $5,000 per year for three years. You may take a tax credit for 50% of your SIMPLE IRA plan start-up costs up to the lesser of
- $5,000 or
- $250 multiplied by the number of nonhighly compensated employees eligible to participate in the plan (but at least $500)
SIMPLE IRA plans are generally inexpensive to establish, but you can also use this tax credit for expenses related to educating your employees about the SIMPLE IRA plan and saving for retirement. You may also qualify for an additional $500 per year tax credit for the first three years of your SIMPLE IRA plan if you automatically enroll your employees into the plan (rather than waiting for them to elect to participate).
Mainstar Trust Has Everything You Need
Mainstar Trust has everything you need to open a SIMPLE IRA plan, including the employer-level document to establish the plan, the employee-level documents to open individual SIMPLE IRAs, and sample notices to help inform your employees about their new savings opportunity.
Contact Mainstar at 1-800-521-9897 for SIMPLE IRA questions or for help with the documents and steps to start up a retirement plan for you and your employees.