A SIMPLE IRA Plan Savings Incentive Match Plan for Employees of Small Employers allows employees and employers to contribute to individual employee retirement accounts. As the name implies, it’s a simplified plan geared toward small employers, which means it’s relatively easy to set up and operate, with lower administrative costs than for more complicated types of retirement plans.
Which Employers Are Eligible?
To have a SIMPLE IRA plan, you must be a small business the general rule is 100 or fewer employees. However, if you should subsequently exceed that 100-employee limit, there is a two-year grace period in which you can still be considered a small business.
Also, note that if you have a SIMPLE IRA, you can’t have another retirement plan (except if the plan is for union employees whose benefits were established under a collective bargaining agreement).
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Which Employees Are Eligible?
Any employee who has received at least $5,000 in compensation from you during the last two years and who is expected to receive at least $5,000 in the current year can participate in the SIMPLE IRA. You can exclude from your SIMPLE IRA plan unionized employees whose retirement benefits are covered by a collective bargaining agreement and nonresident alien employees you have given no wages, salaries, or other personal services compensation.
How Do Contributions Work?
As with other employer plans, you get a tax deduction for contributions you make to the SIMPLE IRA plan. When you set up the plan, you select one of two ways to contribute:
- Matching contributions. You match your employees’ contributions dollar-for-dollar, up to 3 percent of pay.
- Nonelective contributions. For each eligible employee, you pay a nonelective contribution of 2 percent of that employee’s salary—even if the person doesn’t contribute to his or her SIMPLE IRA.
Employee contribution limits to a SIMPLE IRA plan are $9,000 this year and $10,000 in 2005. If the employee is age 50 or over, a “catch-up” contribution is also allowed ($1,500 for 2004, $2,000 for 2005, and $2,500 for 2006).
How Do You Set Up a SIMPLE IRA?
You can set up a SIMPLE IRA for the current year anytime between January 1 and October 1. You’ll need to fill out one of two IRS forms, both of which contain detailed instructions on the process of establishing a SIMPLE IRA:
- Form 5304-SIMPLE. Use this form if employees are allowed to select the financial institution receiving their SIMPLE IRA plan contributions.
- Form 5305-SIMPLE. This form is used if you require all contributions under the SIMPLE IRA plan to be deposited with a designated financial institution.
Note that neither form needs to be filed with the IRS. Also, double-check with your bank before filling out the paperwork as different banks use different versions of the forms.