Simple IRA Plan

Many small employers want to provide the benefits of a 401(k) plan to their employees but need a more cost effective and simpler option. The establishment of a SIMPLE IRA Plan can provide the employer with many of the same benefits of a 401(k) plan without the increased cost of administration.

What is a SIMPLE IRA Plan?

A SIMPLE IRA Plan is an IRA-based retirement plan providing small employers with a simplified method to provide retirement benefits to their employees. These plans allow employees to save toward their retirement by making salary reduction contributions and the employer making either a matching or nonelective contributions to the plan. These contributions are deposited in an Individual Retirement Account (IRA) for each employee and invested based on the direction of the employee. These IRA accounts can be established with a single custodian who provides a financial advisor for the employees account or the employer can allow the employee to select their own financial advisor to establish the IRA.

How much can be contributed to a SIMPLE IRA Plan?

The maximum contribution an employee can contribute to a SIMPLE IRA Plan is $11,500 (indexed). In addition, an employee who has attained age 50 can contribute an additional $2,500 (indexed) to the plan as a catch-up contribution.

The employer contribution to the plan will either be a matching contribution or a nonelective contribution. If the employer selects the matching contribution, the employer will be required to match all employee salary reduction contributions 100 percent up to 3 percent of the employee’s annual salary.

If the employer does not want to require the employee to contribute to the SIMPLE IRA plan in order to receive a contribution, the nonelective contribution option can be utilized. The nonelective contribution option requires the employer to contribute 2 percent of compensation for all employees eligible to participate in the SIMPLE IRA plan regardless of whether they are currently deferring their own compensation into the plan. This method is not frequently used in SIMPLE IRA plans because it does not require any participation on the part of the employee.

Can employees contribute to a SIMPLE IRA plan?

Yes, an employee can contribute compensation through a salary reduction agreement with the plan. These salary reductions are remitted to the SIMPLE IRA each payroll period. Once the employee commits to the salary reductions, this election can be changed as frequently as allowed by the employer. A company policy regarding the frequency of salary reduction agreement changes should be established and distributed to the employees.

Is the Employer required to contribute to a SIMPLE IRA plan?

The employer is required to contribute to the SIMPLE IRA plan. The employer does have the option of either funding a 100% match up to 3 percent of compensation or a 2 percent of compensation nonelective contribution to all eligible employees regardless of their participation in the salary reduction portion of the plan.

The employer contribution is required each year but does not have to be deposited in the SIMPLE IRA plan accounts until the due date of the employer’s tax return including extension. Therefore, a calendar year corporate taxpayer with a tax return on extension would not be required to deposit the employer contributions until September 15th of the following year.

How does an employee receive their money from a SIMPLE IRA plan?

The employee has access to his/her account at all times. Distributions can be requested from the financial institution and/or the financial advisor at any time. However, the amounts withdrawn from the SIMPLE IRA plan account will be subject to federal income taxes in the year the distribution. In addition, any distributions taken from the SIMPLE IRA plan prior to the SIMPLE IRA plan account being in existence for at least 2 years will be subject to a 10 percent excise tax assessed by the Internal Revenue Service (IRS). Also, any distribution received by an employee under the age of 59 ½ will result in an early withdrawal penalty of 10 percent as well.

What is required to administer a SIMPLE IRA Plan?

In order to establish a SIMPLE plan, the employer must adopt a plan document and have the plan in place no later than October 1st of the calendar year. The plan document can either be a Form 5305-SIMPLE or a SIMPLE prototype plan document provided by your financial institution. Once the document is executed, the employer will work with a financial advisor and a financial institution to establish the IRA accounts. After funding the plan, the employee will receive statements from the financial institution and work with the financial advisor regarding the investment of his/her account.

What are the first steps to getting a SIMPLE IRA plan started?

If you are interested in exploring a SIMPLE IRA plan for your company, please contact Resource Benefits Administrators at (254) 776-6214 or (512) 342-1652 and a representative will assist you with your questions and the procedures needed to get your plan established.

3415 Greystone Drive, Suite 205
Austin, Texas 78731
(512) 342-1652
5400 Bosque Blvd, Suite 500
Waco, Texas 76710
(254) 776-6214

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