SIMPLE-IRA

A SIMPLE-IRA is a Savings Incentive Match Plan for Employees IRA.

If you want a SIMPLE-IRA plan, you must be a small business – that is, one with 100 or fewer employees. Even self-employed people can establish a SIMPLE-IRA. 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 (or, has ownership of) all contributions to their IRA.

With a SIMPLE-IRA, you:

• Cannot have any other retirement plan.
• Would contribute a dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee. (Under a “non-elective” contribution formula, even if an eligible employee doesn’t contribute to the SIMPLE-IRA, that employee would still receive an employer contribution to their SIMPLE-IRA equal to 2% of their salary.)

Choosing a Retirement Plan: SIMPLE-IRA

Highlights:

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 (no pun intended) 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 - $9,000 in 2004 with annual increases in $1,000 increments until the limit of $10,000 is reached in 2005. If the employee is aged 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is: 2004 - $1,500; 2005 - $2,000; and 2006 - $2,500.

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.

Operating a SIMPLE-IRA

Once the initial paperwork is done, there are no annual filing requirements for a SIMPLE-IRA plan.
The lack of filing requirements cuts down on the administrative costs of having a SIMPLE-IRA plan.

Generally, any employee who performs services for your company is eligible to be included in a SIMPLE-IRA. However, there are some exceptions to this general rule. Among the employees that may be excluded from a SIMPLE-IRA are those who:

• Are covered by a collective bargaining agreement, if retirement benefits were the subject of good-faith bargaining.

By establishing a SIMPLE-IRA, you the employer have adopted a plan that has a trust for the plan assets and each of your employees (including yourself) has a separate account within the trust. A SIMPLE-IRA can be funded by either employer contributions or by a combination of employee and employer contributions. Contributions to each employee’s account are limited. Each employee is always 100% vested in (or has total ownership of) the contributions to their SIMPLE-IRA. Publication 560 helps self-employed individuals determine the amount of their maximum deduction.

SIMPLE-IRAs are different from SEPs in that not every eligible employee is required to participate in the plan. Participation in the SIMPLE is dependent upon which contribution formula you have chosen:

• If you decide to make a 2% non-elective contribution, then each eligible employee must participate in the plan and receive the appropriate contribution regardless of whether the employee makes elective deferrals to their IRA.
  
• However, if you decide to do the dollar-for-dollar match up to 3% of pay, then only the eligible employees that have elected to make contributions to their IRA will receive an employer contribution – the matching contribution.

Each participating employee must receive an annual statement stating the amounts contributed to their account for the year.

How Does a SIMPLE-IRA Work?

Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE-IRA for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s salary. Under this option, if a Rockland employee does not contribute to the SIMPLE-IRA then that employee does not receive any SIMPLE-IRA contribution from Rockland.

Elizabeth has a yearly salary of $50,000 and decides to contribute 5% of her salary to the SIMPLE-IRA that has been established for her. Elizabeth’s yearly contribution is $2,500 (5% of $50,000). The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE-IRA that year was $4,000 (her $2,500 contribution plus the $1,500 contribution from Rockland). The financial institution partnering with Rockland on the SIMPLE-IRA has several investment choices and Elizabeth is free to pick and choose which ones best suit her.

In another example of a SIMPLE-IRA, Austin has worked five years for the Skidmore Tire Company, a small business with 75 employees. Skidmore has decided to establish a SIMPLE-IRA for its employees and will make a 2% non-elective contribution for each of its eligible employees. Under this option, even if an eligible Skidmore employee does not contribute to the SIMPLE-IRA then that employee would still receive a contribution from Skidmore to SIMPLE-IRA equal to 2% of their salary.

Austin has a yearly salary of $40,000 and has decided that this year, he simply cannot make a contribution to the SIMPLE-IRA that has been established in his name. Even though Austin does not make a contribution to his SIMPLE-IRA this year, Skidmore must make a contribution to Austin’s SIMPLE-IRA of $800 (2% of $40,000). The financial institution partnering with Skidmore on the SIMPLE-IRA has several investment choices and Austin has the same investment options as the other plan participants.

After you send the SIMPLE-IRA contributions to the financial institution, the financial institution you selected will manage the funds. It’s worth noting that employees can move their SIMPLE IRA assets from one IRA to another.

Depending on the financial institution, SIMPLE contributions can be invested in stocks, mutual funds, money market funds, savings accounts and other similar types of investments.

Terminating a SIMPLE-IRA

If the time comes when a SIMPLE IRA plan no longer suits the purposes of your business, consult with your financial institution partner to determine if another type of retirement plan (or, perhaps, no plan at all) might better suit your needs.

To terminate a SIMPLE-IRA, notify the financial institution that you chose to handle the SIMPLE-IRA that you will no longer be making contributions and that you want to terminate the contract or agreement with it. You must also notify your employees that the SIMPLE-IRA has been discontinued. You do not need to give any notice to the IRS that the SIMPLE-IRA has been terminated.

HIGHLIGHTS OF SIMPLE IRA

• Available starting in 1997 and only for companies with less than 100 eligible employees.
• Companies with 100 or fewer employees that offer a retirement plan starting in 2002 or later, (assuming no plan in the last 3 years) receive a tax credit to offset administration and employee educational expense for the first three years of the plan.
• Low income plan participants receive a tax credit for plan participation; however, participant must be at least 18 years of age, cannot be a full time student and cannot be a dependent on someone else’s tax return.
• C Corporations, S Corporation, Single Employee Corporations, Self Employed, Not For Profit Corporations, Professional Corporations, and the like can establish a SIMPLE IRA.
• Companies with a Company SIMPLE IRA Plan cannot have another company pension plan.
• Retirement plan funding comes from voluntary employee salary deferral ($9000 per year maximum), plus mandatory employer % of salary match (3% to 1%).
• Starting in 2002, catch up contribution provision available for individuals over 50 years of age.
• Every eligible employee who meets the requirements of plan as established by the employer must be offered access to the plan.
• Every W-2 individual employee (including husbands, wives, and children employed by the company) can voluntarily put 100% of their income into Simple IRA up to maximum of $7000 each per year.
• Effectively, a very highly compensated individual (including owners) can put up to $13,000 maximum yearly into their Company Simple IRA account. $7000 would be from salary reduction and $6000 from the company match assuming match was 3% and salary was $200,000 per year.
• Husbands and wives employed by company can put in between $13,000 and $26,000 into their combined IRAs assuming 3% employer match and depending on their income levels.
• Employer must match employee contribution dollar-for-dollar up to 3% of compensation ONLY for all eligible employees who voluntarily elect to participate in plan. However, employer can lower percentage to 1% for any two out of every five years. There is NO match for those who do not want to be in plan. OR employer can elect to contribute 2% of salary of all eligible employees whether they want to be in plan or not.
• Employer has flexibility regarding length of employment (from one day to maximum of two years) and income level when defining who is eligible for plan. Union employees under collective bargaining can be eliminated as eligible for plan.
• However, eligible employees MUST include those who have earned at least $5,000 in compensation in the prior TWO YEARS and who are reasonably expected to receive $5,000 during the coming year.
• No-cost turnkey plan offered. There is no annual discrimination or top heavy testing required for plan, no IRS filing, and no 5500 reporting.
• Employee’s salary reduction is made on a pre-tax basis and excludable from current income tax. Employer matching contribution are deductible (if made by due date, including extensions, for employer's tax return).
• Participants are always 100% vested immediately. This includes salary reduction and employer matching contribution.
• Loans are not permitted and there is a two year waiting period before money can be rolled into an IRA, ROTH IRA. Assets can be rolled from one SIMPLE IRA to another SIMPLE IRA.
• Withdrawals from SIMPLE IRA are subject to a 25% tax penalty during the first two years if under 59 1/2; 10% penalty after two years and under 59 1/2.
• Distributions are generally taxed under rules governing IRAs.
• Participants direct their own investments within different asset classes within a family of mutual funds and/ or variable annuities.
• Generally, 100% of contributions are placed into mutual funds or variable annuities within plan, if funds are transferred out of plan, a deferred sales charge may apply.
• Both employer and employee contribution can only come directly from employer and these contributions are sent directly to participant accounts at the mutual fund or variable annuity company.
• Participants can transfer their monies toll free between mutual funds investment account, and or variable annuity sub accounts, at no cost.
• Participants directly receive monthly statements and trade confirmations on any account switches.
• Frequently a SIMPLE IRA offers employers far greater tax saving and economic advantage at less direct and indirect cost than 401Ks, Simple 401Ks, other type retirement plans, SEP-IRA's and or IRAs.
• Contributions to these other plans can be stopped, and held tax deferred until retirement, and a SIMPLE IRA can be instituted in place of these other plans.
• Part time, 1099 income individuals, can have a SIMPLE IRA plan for this income, even though they might be employed and participate in their other employer's 401K, 403B, SEP-IRA, etc.

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