SIMPLE IRA:
a retirement plan for the self-employed and small businesses


SIMPLE IRA Retirement Plans (an acronym standing for "Savings Incentive Match Plan for Employees") were created specifically to provide an inexpensive and uncomplicated retirement savings plan for small business. The SIMPLE IRA plan is available for businesses which have 100 or fewer employees and do not maintain another tax-qualified retirement plan to which contributions are made.

Eligible businesses may be either an incorporated or unincorporated firm. Even tax exempt employers and governmental entities are eligible.


How they work

  • Employees have the option of taking cash, or having it contributed to their SIMPLE IRA accounts for retirement. This is equivalent to the employee making a pre-tax contribution.

  • Mandatory employer contributions are tax-deductible to the business. [IRC Section 404(a)]

  • Employer contributions are not taxed currently to the participants. [IRC Section 402(a)]

  • Earnings accumulate income tax deferred. [IRC Section 501(a)]

  • Participant contributions must be deposited by the employer within 30 days after the end of the month for which the contribution was made.


Features of a SIMPLE IRA plan

  • Any employee who received $5,000 or more of income during any two prior years and is expected to earn $5,000 during the current year must be eligible. Less stringent requirements may be elected by the employer.

  • Each participating employee has an individual IRA account with a financial institution. Money contributed by employees is remitted at least monthly to the financial institution by the employer. Employee contributions are always 100% vested.

  • Employee contributions (including contributions made by owners to their own accounts) are voluntary and limited to $11,500 per year in 2012 (indexed for inflation) and may not exceed 100% of compensation. Participants who are at least age 50 by December 31 may contribute an additional $2,500 per year in 2012 (also indexed for inflation). Participants may stop their contributions at any time.

  • There is no minimum number or percentage of eligible employees who must participate.

  • Business owners may contribute the maximum amount allowed regardless of how little non-owner employees contribute.

  • No annual reports must be filed.

  • Employers must make fully tax-deductible contributions to participating employee accounts. These contributions must satisfy one of two alternatives. Election must be made at least 60 days before the start of the plan year.


    • Alternative #1 -- Matching Contributions

      • Employer matches employee's elective deferral, dollar for dollar, up to 3% of compensation FOR PARTICIPATING EMPLOYEES ONLY.

      • For any two years out of five, employer may elect a lower match, but not less than 1.0%.

      • No conditions may be imposed on the right to receive the employer match such as minimum hours or end of year employment.

      • The employer match may be made during the year "as-you-go" or may be contributed in a single sum after the end of the year by the due date of the employer's income tax return, plus filing extensions.

      • A $250,000 compensation limit does NOT apply when calculating the match.


    • Alternative #2 -- Nonelective Contribution

      • Employer contribution is 2% of compensation to all eligible employees, whether they defer or not.

      • A $250,000 compensation limit DOES apply.

      • Employees may make in-service withdrawals.

      • Additional employer contributions are not permitted.

      • Employers may not maintain another plan to which contributions are made or in which benefits accrue.

      • Participants may rollover their accounts to another SIMPLE IRA, or -- after 2 years of SIMPLE participation -- to a traditional IRA.

      • Generally distributions are taxed as ordinary income the same way withdrawals from a traditional IRA are taxed. Penalty taxes may apply (see below).

      • Distributions made before age 59 ½ and WITHIN the first 2 years of SIMPLE participation are taxed as ordinary income -- plus a 25% penalty -- unless an exception applies.

      • Distributions made before age 59 ½ and AFTER the first 2 years of SIMPLE participation are taxed as ordinary income -- plus a 10% penalty -- unless an exception applies.

      • The employer must notify employee of right to defer and provide information on basic plan details.


    Advantages to employer

    • Unlike 401(k) plans, the employer knows in advance approximately what the financial commitment will be.

    • Employer contribution is tax deductible.

    • The plan is easily understood by employees.

    • Business owners and those classified as "Highly Compensated" may make the maximum dollar contributions permitted regardless of contributions by "Non-Highly Compensated".

    • If an employee terminates, employers have no responsibility regarding the participant's account other than to make the final required matching contribution.

    • There is not cost to establish or to terminate a SIMPLE IRA Plan.

    • Employers are not required to pay any annual administrative fees.


    Advantages to employees

    • Participant deferrals are made with pre-tax dollars.

    • Employer contributions are not currently taxable to the participant.

    • Participants have the right to direct investments.

    • Participants may also have a deductible IRA or Roth IRA--subject to income level and filing status.


    Of note to employer

    • The employer is required to contribute.


    Of note to employer

    • There is no guarantee as to future benefits.

    • Investment risk rests on the participant.



      • Contact me today to find if a SIMPLE IRA or other retirement plan may be right for you and your business.