The 401(k) plan is the most popular workplace retirement plan because it is effective at helping workers save through payroll deduction. Deferring a portion of each paycheck into the plan makes saving convenient and consistent. And plan contributions are deducted from pay before income taxes are calculated, which lowers the employee’s taxable income for the year. Plan contributions and any investment gains are not taxable until the employee takes money out of the retirement plan – ideally in retirement.
Yet, 401(k) plans come with many administrative requirements and fiduciary liability. Many small businesses don’t have the time, expertise, or money to manage a 401(k). Approximately ½ of employees of small businesses do not have a retirement savings plan available at work.1
But there is a 401(k)-like plan available for small businesses that is easy and inexpensive to operate. A business with fewer than 100 workers who earned more than $5,000 in the preceding year qualifies to have a SIMPLE IRA plan. With this plan, employees can defer a portion of their paychecks – pre-tax – into a SIMPLE IRA they establish. No recordkeeper, trustee or third party administrator is needed, just an IRA custodian. The annual contribution limit is $13,500 plus a $3,000 catch-up contribution for those age 50 and older, which is slightly less than the 401(k) plan deferral limit of $19,500 plus a $6,500 catch-up contribution. In exchange for fewer administrative requirements, the business must make either an annual contribution equal to 2% of salary to each eligible employee’s SIMPLE IRA, or a matching contribution up to 3% of compensation for each employee contributing to the plan. Once contributions are deposited into an employee’s SIMPLE IRA, the employer’s responsibility for “plan assets” ends. The employee is responsible for selecting investments and maintaining the SIMPLE IRA.
If you’re interested in establishing a SIMPLE IRA plan for the 2021 tax year, here are few things you need to know.
Deadline to Establish a SIMPLE IRA Plan
To have a SIMPLE IRA plan effective this year, you generally must establish the plan by October 1.
When you establish a plan, you must provide your employees a 60-day period to decide whether to contribute to the plan for the year. The notice period may be satisfied 60 days before your plan is effective or during the first 60 days of the plan year.
After the initial 60-day election period when the plan is established, the plan must provide a 60-day election period when an employee first becomes eligible for the SIMPLE IRA plan and before each new plan year. Since all SIMPLE IRA plans must be maintained on a calendar-year basis, the annual 60-day notice and election period generally runs November 2–December 31 each year.
How to Establish a Plan
The business should authorize the adoption of the plan. The approval process will vary depending on the business structure but should be documented. This could include a board resolution, a committee meeting with minutes, or partner ratification. Once the business has approved the plan, an employer-level SIMPLE IRA plan document must be completed and signed. You will then need to provide information about the SIMPLE IRA plan to your employees and request each eligible employee establish a SIMPLE IRA with an IRA custodian of their choice.
Plan Start-Up Tax Credits
The tax code provides a tax credit to help offset any start-up costs. Even if you have few expenses for establishing the plan, this tax credit may be claimed for expenses related to educating your employees about the plan and the benefits of saving for retirement. The tax credit is worth 50% of your plan start-up costs up to the lesser of
- $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan (but at least $500) or
- $5,000
Deposit Deadline
Once your employees have made their salary deferral elections and you begin withholding plan contributions from their paychecks, you must deposit the deferrals to the SIMPLE IRAs “as soon as it is reasonably possible to segregate them from the company assets.” For small plans, deferrals deposited by the 7th business day following withholding by the employer are considered to meet the requirement. You may choose to make your contributions to your employees’ SIMPLE IRAs on a per payroll basis or at any point before your tax-filing deadline plus extensions for the year.
Start Here
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 SIMPLE IRAs, and sample notices to help inform your employees about their new savings opportunity.
You can use our SIMPLE IRA plan documents to get started on your own, or call us at 1-800-521-9897 for help with the documents and the steps to start up a retirement plan for you and your employees.
1 Department of Labor, Bureau of Labor Statistics, Employee Benefits in the United States News Release, September 2020, https://www.bls.gov/news.release/archives/ebs2_09242020.htm