The SIMPLE IRA: Retirement Plan Options for Small Business


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The owner of a small business such as a sole proprietorship, partnership, S or C-Corp, has several options to choose from when saving for retirement. They can set up a SIMPLE IRA, a SIMPLE 401(k), a One-Participant 401(k), or a Defined Benefit Plan. Each of these plans have tax advantages and can enable owners and their employees to save significant amounts of money towards retirement. However, it is important to choose the type of plan that fits the best with company structure, cash flow availability, and tax needs. Let’s examine each plan in detail below.

SIMPLE IRA

General Requirements:

  • Used for small companies with fewer than 100 employees
  • Contribution limit of $13,000 for 2019
  • Allows catch-up contributions of $3,000 for employees over the age of 50
  • Employers must contribute each year
  • Contributions vest immediately
  • Require less paperwork and filing requirements each year. No Form 5500 required.
  • Employer can choose either matching contributions or a set 2% contribution for each employee, regardless of whether the employee elects to contribute to the plan as well.
  • Must be set up between January 1 and October 1 of the tax year (unless company is established after October 1)
  • Cannot be combined with other plans such as profit sharing or 401(k)

The SIMPLE IRA (Savings Incentive Match Plan for Employees) is an employer-sponsored option that enables employers to either match an employee’s plan contributions or contribute to an employee’s plan at a set percentage rate. Typical matching is 1-3%, while set contributions are 2%. It is important to note that the company must choose from either matching or direct contributions. All contributions are immediately vested into the plan.

For 2019, contribution limits for SIMPLE IRAs are $13,000, and catch-up contributions for employees over 50 are $3,000. The plan is available only to businesses that have fewer than 100 employees.

SIMPLE IRA’s are easier and require less paperwork than other retirement options for a small business. This can be a strong advantage for companies that want to offer retirement plan options for their employees, but do not want to be forced to pay for an actuary to revalue the plan on a yearly basis or face a heavy administrative burden.

In addition, sole proprietors can contribute to themselves on both an employer- and employee-based 3% maximum, so it is possible for the sole proprietor to contribute up to $26,000 per year ($32,000 if they are 50 or older).

SIMPLE 401(k)

General Requirements:

  • Used for small companies with fewer than 100 employees
  • Contribution limit of $13,000 for 2019
  • Allows catch-up contributions of $3,000 for employees over the age of 50
  • Employers must contribute each year
  • Contributions vest immediately
  • Form 5500 must be filed with the IRS each year, which can be costly for business owners who are not familiar with filing requirements.
  • Employees can withdraw funds as a loan to meet obligations if necessary
  • Must be set up between January 1 and October 1 of the tax year (unless company is established after October 1)
  • Cannot be combined with other plans such as profit sharing or IRA

The SIMPLE 401(k) is similar to the SIMPLE IRA. Contribution limits for the SIMPLE 401(k) are $13,000, and catch-up contributions for employees over 50 are $3,000. The plan is available only to businesses that have fewer than 100 employees.

Contributions to the plan vest immediately – there is no waiting period. Employers must choose to either match employee contributions at a set percentage (generally 1-3%) or make a set contribution of 2% of the employee’s salary, regardless of whether the employee chooses to contribute to the plan themselves.

One major advantage of the SIMPLE 401(k) is the ability for an employer to include the option of loans to their employees. Using this, employees may withdraw a loan based on their 401(k) plan balance if they need to use their assets when ineligible for a regular distribution. This calculator will help.

The IRS requires companies that have a SIMPLE 401(k) to file Form 5500 each year. This form details the financial health of the plan and contributions that were made during the year. It can be complicated to complete for owners who are not knowledgeable of tax rules and can present with significant financial penalties if not filed promptly or correctly. It is advisable to have an outside administrator or CPA review the plan and assist in completing the form, which can result in additional costs.

Paul Sundin

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