A SIMPLE IRA is an employer-sponsored retirement plan offered within small businesses. These saving plans make it easier for self-employed individuals and small businesses to offer tax-advantaged retirement plans. The term “Simple IRA” is an acronym for Savings Incentive Match PLan for Employees Individual Retirement Account.

Simple IRA Plan For Small Businesses And Employees

How the Plan Works

Each year, employers are required to make a matching contribution to any eligible employee’s SIMPLE IRA account. Employees contribute to those plans via salary deferrals. Matching contribution states that the employer has to match at least what the employee matches. So, if you’re matching 3%, the employer has to match 3% as well. Note that 3% is the most an employer has to match, which could be considerably different than compared to a 401(k). If the employee participates in other employer plans during the year, the total amount of the salary contributions that employee can make is limited to $18,500. 

The Pros of SIMPLE IRA

The operating costs are significantly less than what a 401(k) would be, generally $20 per employee per year. To start a SIMPLE IRA program usually requires only a phone call to the financial institution. One of the major advantages is that a SIMPLE IRA plans can be setup using a one-page IRS Form. Unlike 401(k) plans, SIMPLE IRAs do not require annual filings or compliance testing. The employer generally has no filing requirements with the IRS, as the financial institution handling the investments for SIMPLE IRA plans typically do most of the work.

The Cons of SIMPLE IRA

Depending on how you look at it, there are some drawbacks to SIMPLE IRA. These include that the account holders cannot take loans against their assets like they can with a 401(k). This is because a SIMPLE IRA is first and foremost, an IRA. Just as you cannot borrow money from a traditional or Roth IRA, you also can’t borrow from a SIMPLE IRA. It’s important to remember that the most vital aspect of any retirement plan is giving employees the ability to create a tax-sheltered investment for their retirement. A SIMPLE IRA forces employees to keep the plan for its primary purpose because they cannot borrow against it.

Choosing A SIMPLE IRA

SIMPLE IRAs are ideal for small business owners who have more than 5-8 employes but want to avoid the cost of administering a 401(k) plan. In many cases, this employee retirement plan fits well for small business owners who aren’t making substantial profits or aren’t capable of maximizing contributions under a 401(k). The business owner will choose a financial institution to serve as trustee of the SIMPLE IRAs to hold each employee’s retirement plan assets. Each participant must have a separate IRA account. Lastly, execute a written agreement to provide benefits to all eligible employees before the beginning of the election period.

SIMPLE IRA Plan Requirements For Small Businesses

1. Currently employ less than 100 people
2. Have no other retirement plans offered
3. Dollar-for-dollar matching contributions (not to exceed 3% of the employee’s compensation)
4. A 2% nonelective contribution to all eligible employees, regardless of whether they made contributions
5. Establish the plan by October 1

SIMPLE IRA Plan Requirements for Employees

1. Earn at least $5,000 during any 2 years before the current calendar year, and
2. Expect to receive at least $5,000 during the current calendar year
3. Cannot contribute more than $12,500 to a SIMPLE IRA each year
4. Age 50 and older may contribute an extra $3,000 per year as a catch-up contribution
5. Contribution limit of $18,000 if participating in multiple employer plans

Note: Employers cannot impose any other conditions for participating in a SIMPLE IRA plan.

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