Intro to the SIMPLE IRA
A SIMPLE (Savings Incentive Match Plan for Employees) IRA (Individual Retirement Account) is a type of retirement plan companies can adopt if they have 100 or fewer employees. Despite the long name, as the acronym implies, these plans are simple. They are both simple to set up and manage. Though these plans are simple, they are not as flexible as other options out there. Administration and startup costs are low if you are looking to start one. Generally, we see these types of accounts set up through a fund provider or a brokerage account.
Basics of SIMPLE IRAs
Employee Contribution Max
$13,500 or $16,000 for those over 50-year-old for 2020. The maximum contribution limits change almost yearly to account for inflation.
Eligibility
Employees who earned at least $5,000 in any of the last two years or expect to make that amount this coming year would be eligible. Employers can be less restrictive if they want. An employer can exclude employees covered by a union agreement or those who are nonresident alien employees who do not have “U.S. Wages, Salaries, or other personal services compensation from the employer?”
Matching
Unlike the flexibility of a 401(k), a SIMPLE IRA gives the employer two choices.
- Contribute 2% to all retirement accounts regardless of whether or not the employee also contributes.
- Match employee contributions up to 3%.
Setup
It usually makes sense to have a professional help you set up a SIMPLE IRA.
Timing
A SIMPLE IRA can be set up any date January 1 through October 1 of that year, if you had no plan prior.
Execute agreement
You will need to set up one of two types of documents.
- Form 5305-SIMPLE: If the SIMPLE IRA contributions will go to an employer-designated financial institution.
- Form 5304-SIMPLE: If the participant is to select the financial institution that will be receiving his/her SIMPLE IRA contributions.
Does a SIMPLE IRA make sense for your company?
If you are looking for an option that is simple, inexpensive, and you are not looking to add additional incentives to stay, such as vesting periods, this can be a great option.
Pros
- Easy to set up
- Easy to administer
- Generally Low admin costs
- Low startup costs
- Contributions are tax-deductible
Cons
- Lower max contribution limits compared to a 401k
- Less flexible plan design than some other options
- No vesting schedules
- Only two employer contribution options
- Less restrictive eligibility requirements than other plans
- Must have 100 or fewer employees
- Possible fund limitations, if adopted under one fund family
Other Resources
https://www.irs.gov/retirement-plans/establishing-a-simple-ira-plan
https://www.investopedia.com/terms/s/simple-ira.asp
Talk to a professional to make sure you understand all your options. Please reach out to us. If you are looking for guidance in choosing a retirement plan, we would love to help.