If you are looking for a retirement plan for your employees that is easy and inexpensive, you may want to look at a SIMPLE IRA plan. Savings Incentive Match Plan for Employees of Small Employers, or SIMPLE IRA plans allow employees to defer up to $13,500 of compensation in 2020 ($16,500 if age 50 or above). The employer must match employee contributions up to 3% of pay, or to make a nonelective contribution for all eligible employees, equal to 2% of pay. If you are self-employed you can set up a SIMPLE IRA for yourself and make contributions even if you don’t have employees. If you receive a 1099-MISC for work performed, you likely have self-employment income.
How do I set up a SIMPLE IRA Plan?
You can set up a SIMPLE IRA plan for 2020 if you had 100 or fewer employees in 2019 (Not including employees who earned less than $5,000) and you don’t contribute to any other retirement plan. You have until October 1st to set up a new SIMPLE IRA Plan for 2020. A financial advisor or brokerage can assist in establishing the plan.
Step 1: Complete some basic paperwork
You can set up a SIMPLE IRA plan by completing the 5305-SIMPLE form from the IRS or your financial institution. This form defines some basic plan provisions such as eligibility and matching. It includes a model notification form to inform employees of their options and elect to defer a portion of their income.
With an eligible institution, SIMPLE IRA accounts are established to receive the salary Reduction contributions and matching funds. The employees will select investments and designate a beneficiary.
Step 2: Provide information to your employees annually
You must provide eligible employees with the following information at the beginning of each election period:
- An explanation for the employee regarding their ability to make or change salary reduction elections
- A decision on whether you will make matching contributions or nonelective contributions for the upcoming year
- A summary of the plan
- If you use a designated financial institution, a notice that employees can transfer their account balances to an IRA provider of their choice without penalty
Advantages of SIMPLE IRA plans
- SIMPLE IRA Plans are not required to follow certain Internal Revenue Code rules. Even if no employees want to contribute, you can establish a plan, contribute, and provide an employer matching contribution
- You are not required to file reports with the government, only the financial institution holding the IRAs is required to file reports
- The plan requires minimal paperwork, hence the name
- Employer contributions can be flexible and you can decide whether you want to provide a matching contribution or nonelective contribution
- Your business can deduct contributions made to a SIMPLE IRA
Disadvantages of SIMPLE IRA plans
- You are required to make a contribution every year
- Your employees are vested immediately. Immediate vesting can be costly if you have high turnover
- You are not allowed to maintain any other employer sponsored retirement plans
- The annual employee deferral is more than an IRA, but significantly less than a 401(k) plan