SIMPLE Retirement Plan Basics for Small Businesses
In recent years, government officials and financial experts alike have expressed concern that many Baby Boomers - especially those who work for smaller companies - may find themselves at retirement age without the necessary savings. Moreover, their retirement may last 25 years or more.
To address this problem, Congress passed the Small Business Job Protection Act in 1996. Among other things, it created a simplified retirement plan for small businesses, aptly named the Savings Incentive Match Plan for Employees, or SIMPLE retirement plan. The idea is to encourage more firms to offer plans by making additional retirement saving options available to small-business employees and streamlining reporting requirements for small businesses.
At the same time, this law eliminated Salary Reduction for Simplified Employee Pension Plans, known as SARSEPs, in favor of SIMPLE plans. (However, SARSEPs that were already established and permitted salary reduction contributions on December 31, 1996, may continue. New employees can participate in these plans and make salary reduction contributions.)
Your company may qualify for a SIMPLE plan if it does not currently sponsor a retirement plan and has no more than 100 eligible employees on any one day of the year. (Should your company grow to the point that it exceeds the 100-employee limit, the plan will be allowed to continue for two years.)
To participate, employees must have earned at least $5,000 in compensation during any two earlier years and must be expected to earn at least that amount during the current year.
These plans can be set up either as an individual retirement account (IRA) for each employee or as part of a 401(k).
If established as an IRA: The SIMPLE plan will not be subject to the nondiscrimination rules that are generally applicable to qualified plans (including top-heavy rules). The elimination of this testing requirement is designed to make plans easier and less costly to administer. In lieu of this requirement, all workers will be able to contribute the maximum allowed.
- The company must either match the contribution the employee has chosen to make dollar for dollar up to 3% of compensation, or make a 2%-of-compensation non-elective contribution for each eligible employee. (There is some flexibility here, as an employer can match the contributions of as little as 1% of compensation in two out of five years.)
- All contributions must be vested to an employee's SIMPLE account.
- Employee contributions are expressed as a percentage of the employee's compensation and cannot exceed $12,500 in 2015 ($15,500 for those aged 50 and older).
- Employees can decide to participate, or to change the amount of their contribution, within 60 days before the start of a new year or 60 days before they are eligible to participate. Employees must also be allowed the flexibility to terminate their participation at any time during the year.
- An employee's elective deferrals to his or her account must be made within 30 days of the end of the month for which the contributions were made.
- Employee contributions are deductible. In addition, contributions are excludable from the employee's income and are not considered taxable until they are withdrawn. Matching contributions made by the employer and non-elective contributions are not considered wages for either employment tax or withholding purposes.
- The company's contributions are generally deductible for a particular year if they are made by the due date, including extensions, of that year's return.
- SIMPLE IRA distributions can be rolled over into another IRA or SIMPLE plan, but not to another qualified plan.
- If employees make withdrawals before age 59½, those withdrawals are subject to the 10% penalty applicable to IRAs. To further encourage employees to keep the funds in their SIMPLE accounts until they retire, the law calls for a higher 25% early withdrawal tax should the employee withdraw any contributions that were made during the two-year period beginning on the date the employee first participated.
The plan does not have to satisfy the special 401(k) nondiscrimination tests for elective deferrals and employer matching contributions, provided the employer matches elective deferrals up to 3% of the employee's compensation, or makes an annual 2%-of-compensation nonelective contribution for eligible employees (those with compensation of at least $5,000).
- Employees may take loans from their SIMPLE 401(k) plans.
- Both the company and the plan fiduciary have somewhat reduced fiduciary liability for losses resulting from either the employee or the beneficiary exercising control over the assets in the account, with respect to (1) the choice of investment the employee or beneficiary makes; (2) a rollover to another SIMPLE account or IRA; or (3) the elapse of one year.
- Companies that establish SIMPLE 401(k) plans do not have the flexibility to reduce their matching contributions to 1% of compensation in two out of five years, as do companies that establish their plans as SIMPLE IRAs.
|Who Qualifies for SIMPLE?|
The Internal Revenue Service has released a model SIMPLE plan that companies can adopt by using IRS Form 5305-SIMPLE. In addition, this package contains a model notification form for eligible employees that meet notification requirements for the SIMPLE plan. It also includes a model salary reduction agreement.
The plan is in force once the company and the participating financial institution have completed and signed it. Companies are required to retain the form rather than send it to the IRS.
Points to Remember
- Created in 1996, the Savings Incentive Match Plan for Employees (SIMPLE) is designed to streamline retirement plan reporting and to encourage small businesses to set up retirement plans.
- SARSEP salary reduction plans that were active on December 31, 1996, can continue to receive contributions and new employees can enroll in these programs.
- SIMPLE plans can be set up as either individual retirement accounts (IRAs) or 401(k) plans.
- In order for employees to participate, they must have earned $5,000 in each of the two previous years and be reasonably expected to earn $5,000 in the current year.
- Nondiscrimination rules do not apply to SIMPLE IRAs and 401(k)s, and employers can benefit from flexible matching rates.
- SIMPLE 401(k) plans carry a somewhat reduced fiduciary liability in certain cases.
- A model SIMPLE plan can be obtained from the Internal Revenue Service.
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