Savings Incentive Match Plan for Employees
The SIMPLE IRA is the Savings Incentive Match Plan for Employees. The SIMPLE allows for both employer contributions and employee deferrals. The plan is deal for employers who want to contribute something – but not a lot – to employee retirement accounts.
A big part of retirement plan design has to do with discrimination. The IRS wants to be sure that the plan does not discriminate, meaning that the plan’s benefits are available across the board to all employees – both management and rank-and-file.
This post is the second in a series of two about retirement plans available to the small business. Previously I discussed the SEP IRA, or Simplified Employee Pension. The most notable thing about the SEP is that money goes into an employee’s account from only one source – the employer’s contribution. The same percentage of earnings – up to 25% – must be contributed across the board. If an employer, for example, contributes 25% of his own earnings to his SEP account, he must contribute the same 25% of earnings to all employee accounts. In this way the plan is not discriminatory. There is, however, no opportunity for the employee to make deferrals. The SEP is ideal for the employer with few or no employees who’s looking to save more than a traditional IRA allows.
Who Is Covered
The SIMPLE is for an employer with fewer than 100 employees who earned less than $5000 in the previous year. The employer cannot have any other retirement plan – only the SIMPLE. Any employee who earned $5000 in any of the previous two years and expects to do so in the current year is eligible to participate. The plan must be established before October 1st for the current year. After Oct. 1st it will become effective for the following year.
Two safe harbors exist for the employer to make non-discriminatory contributions: the 2% and the 3%. An employer can choose from two sets of rules:
The 2% rule
The employer contributes 2% of payroll to all eligible employees. This is subject to a $275,000 salary cap, so the maximum 2% contribution will be $5500.
The 3% rule
The employer makes a 3% of payroll matching contribution only to those who choose to defer into the plan. If Employee A deferred 3% of his earnings, the employer with match with an equal amount. The maximum employee deferral allowed is $12,500. Those over age 50 can defer an additional $3000.
All contributions vest immediately. There is one unique feature to the SIMPLE, though: any transfers, distributions, or rollovers made during the first two years incur a 25% tax penalty – not the usual 10% penalty before age 59 ½. The clock starts running when the first deposit hits the account.
If you participate in a SIMPLE IRA, you may still eligible to do your own Traditional or Roth IRA. Deductibility of the Traditional IRA depends upon income limits and coverage under other qualified plans. Roth participation depends upon income limits.
The SIMPLE, then, as I see it, is a good way for an employer to give something to his employees, and to give them an opportunity to defer. From the employee’s point of view this is “free” money – a benefit that the employer chooses to give over and above salary. Each participant has his or her own IRA and makes his or her own investment choices. Upon separation from service the SIMPLE balance – after two years – can be rolled into a personal IRA or a qualified plan with a new employer.
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