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Choosing a Retirement Plan: Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA)

In order to have a SIMPLE-IRA plan you must be a small business – that is, you must have 100 or fewer employees. However, there is a two-year grace period for growing employers to still be considered as a small business, even if they go over the 100-employee limit. If you do opt for a SIMPLE-IRA plan, your employees can elect to defer part of their salary. Each employee is always 100% vested in all contributions to their SIMPLE.

With a SIMPLE-IRA, you:

  • Cannot have any other retirement plan.
  • Would contribute either some matching or “non-elective” contributions.
  • Need to adopt a prototype or complete a simple form or two.

Information List

Pros and Cons:

  • Easy and low-cost to set up and operate.
  • Plan has flexible contribution requirements.
  • Good plan if you want employees to help share responsibility for their retirement.
  • Inflexible contribution limits.

Who Contributes: Employee and Employer contributions.

Contribution Limits:
Employee – $12,500 in 2015. If the employee is aged 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is: $3,000.

Employer – A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee.

Filing Requirements: Establish the plan using Form 5304-SIMPLE (if employees are allowed to select the financial institution receiving their SIMPLE-IRA plan contributions), Form 5305-SIMPLE (if the employer requires that all contributions under the SIMPLE-IRA plan be initially deposited with a designated financial institution) or adopt a prototype. An employer has no filing requirements beyond that. The financial institution handles most of the other paperwork.

Participant Loans: Not permitted.

In-Service Withdrawals: Yes, but subject to income taxes and 10% penalty if under age 59-1/2. Also, if withdrawals are made within the first two years of participation, there is an additional 25% penalty if the employee is under age 59-1/2.

Establishing a SIMPLE-IRA

If you choose to establish a SIMPLE-IRA plan, the financial institution will probably have “pre-approved” SIMPLE-IRAs that you can choose. Once you’ve settled on the SIMPLE-IRA that you think would work best for you and your business, you will need to fill out one of two forms, depending on which contribution formula that you choose:

  1. If employees are allowed to select the financial institution receiving their SIMPLE-IRA plan contributions, you will fill out Form 5304-SIMPLE. This form does not get filed with the IRS.
  2. If the employer requires that all contributions under the SIMPLE-IRA plan be initially deposited with a designated financial institution, you will fill out Form 5305-SIMPLE. This form does not get filed with the IRS.

For more information, please call us at 1.800.508.1144.

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