Since passage of The Small Business Job Protection Act in 1996, employers, particularly small businesses, have had access to more simplified retirement plans. One such plan created by the Act, is the Savings Incentive Match Plan for Employees (SIMPLE). If you represent small businesses, you may be in a position to help your clients establish efficient and cost-effective retirement plans that can reduce taxes and attract employees. Read to learn more about SIMPLE plans and how they might benefit your clients.
What Is A SIMPLE Plan?
SIMPLE IRA plans are available for businesses that have no other form of pension and which have 100 or fewer employees who:
- Have earned at least $5,000 in compensation during any 2 preceding calendar years; or
- Expect to receive at least $5,000 in the current calendar year.
While an employer must make contributions under a SIMPLE plan, employee contributions are optional. More specifically, where an employee elects not to contribute to their plan, employers must still make an annual contribution of 2% up to an annual contribution limit. Where an employee does elect to contribute, then an employer must make a matching contribution of up to 3%. All employer contributions to SIMPLE plans are tax deductible and during the life of a SIMPLE plan, an employee is 100% vested of all funds in the account.
Setting Up A SIMPLE Plan
It's relatively easy for your clients to setup a SIMPLE plan. In doing so, they won't face any filing or annual reporting requirements and their start-up and operating costs will likely be much lower than those associated with other plans. To setup a plan, your client must:
- Execute a written agreement to provide benefits to eligible employees (this can be satisfied with use of an IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE);
- Provide a summary description of the plan (this can simply be the summary contained on the IRS form or it can also be a summary provided by the financial institution);
- Set up an IRA account for participating employees (the plan cannot be setup as a ROTH IRA); and
- Provide annual election notices to employees about the plan.
The annual election notices must include certain information, such as:
- The employee's ability to make a salary reduction choice;
- The employee's ability to choose the financial institution (if no choice is made, the employer can decide);
- The employer's form of contribution (either matching or non-elective);
- A summary description of the plan; and
- Written notice that the employee can transfer their plan balance at no penalty or cost if using a designated financial institution.
Modification and Corrections
An employee can modify their SIMPLE plan by, for example, choosing to end their elected salary reduction contributions. The employee can terminate those contributions at any time, but if they do, your client would still need to make non-elective employer contributions.
Common mistakes can be made when setting up and maintaining a SIMPLE plan, such as where a company:
- Excludes eligible employees;
- Has more than 100 employees who earn $5,000 or more per year;
- Makes incorrect employer contributions; or
- Doesn't satisfy the notification requirements.
Thankfully, the IRS understands that these mistakes can happen and it has created a fix-it guide to help make any needed corrections.
Termination of SIMPLE Plans
Your clients have the right to terminate a SIMPLE plan, especially if they find an alternative plan that works better for their business. To do so, your clients don't need to provide notice to the IRS, but would need to notify:
- The financial institution of their intent to terminate the agreement and discontinue contributions; and
- Their employees within a reasonable time before November 2 for discontinuation by the following January 1st.
Even though no notice to the IRS is required, your clients should maintain documentary records of their actions should any issues arise down the road.
SIMPLE plans are an attractive option for many small businesses. Even if you represent a qualifying business on other matters, it wouldn't hurt to have a discussion about their retirement plans, especially given the ease in setting up and maintaining SIMPLE plans. You can learn more about these plans by reviewing IRS Publication 4334.
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