I understand you are interested in providing a retirement plan option for your employees and you would like in one in which the employees can contribute. Given the size of your business, a SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan would be advantageous for your company. In order to qualify for a SIMPLE IRA plan, there are two basic criteria that must be met:
- First, your business must have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year).
- You cannot currently have another retirement plan.
A SIMPLE IRA plan provides you and your employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. And compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs and they are simpler to operate. One of the main advantages of a SIMPLE IRA plan is that employees can contribute, on a tax-deferred basis, through convenient payroll deductions. With a SIMPLE IRA, you can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay. Another advantage is that you are not required to file annual financial reports.
In addition, 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.
Your choice of the employees covered will be set out in your selected plan document. You can choose to cover all employees without restriction. Alternatively, you can limit the employees covered to those who received at least $5,000 in compensation during any two years prior to the current calendar year and who are reasonably expected to receive at least $5,000 during the current calendar year.
SIMPLE IRA plans operate on a calendar-year basis. You may initially set up a SIMPLE IRA plan for a calendar year as late as October 1 of that year. A SIMPLE IRA must be set up for each employee with contributions under the plan. Employees must receive notice of their right to participate, to make salary reduction contributions, and to receive employer contributions. In addition, employees must receive information about the plan, including a copy of the summary description. The required notice also informs employees of the plan’s election periods during which eligible employees can decide to contribute to the plan.
Employees can make salary reduction contributions in any amount to a SIMPLE IRA plan up to the legal limits. The maximum amount that an employee can contribute is $13,000 for 2019. Additional employee contributions (known as catch-up contributions) are allowed for employees age 50 or over. The additional contribution limit is $3,000 for 2019.
Each year, employees can change their contribution levels during the plan’s election period. This election period must be at least 60 days long, and employees must receive prior notice about an upcoming election opportunity. SIMPLE IRA plans that have already been established must have an annual election period that extends from November 2 to December 31. A plan can have more election periods each year in addition to this 60-day election period.
As the employer, you have two choices in determining your contributions to the SIMPLE IRA plan:
(1) A 2 percent nonelective employer contribution, where employees eligible to participate receive an employer contribution equal to 2 percent of their compensation for the year (limited to $280,000 for 2019), regardless of whether they make their own contributions.
(2) A dollar-for-dollar match up to 3 percent of compensation, where only the participating employees who have elected to make contributions will receive an employer contribution, i.e., the matching contribution.
Each year, you can choose which one you will use for the next year’s contributions. This choice is part of the information you are required to communicate to employees before the beginning of the 60-day election period. Your employer contributions must be made by the due date (including extensions) for filing your business’s federal income tax return for the year.
Participants cannot take loans from their SIMPLE IRAs. SIMPLE IRA contributions and earnings can be withdrawn at any time. When participants take a distribution, they typically can elect to take a lump sum distribution of their account, or roll over their account to an IRA or another employer’s retirement plan. Distributions from a SIMPLE IRA are generally subject to income tax for the year in which they are received. If a participant takes a withdrawal from a SIMPLE IRA before age 59½, generally a 10 percent additional tax applies. If the withdrawal occurs within two years of beginning participation, the 10 percent tax is increased to 25 percent. SIMPLE IRA contributions and earnings may be rolled over tax-free from one SIMPLE IRA to another. A tax-free rollover may also be made from a SIMPLE IRA to another type of IRA, or to another employer’s qualified plan, after two years of beginning participation in the original plan.
As you can see, there are a lot of things to consider.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04032021 320-500)