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SIMPLE Retirement Plans
A relatively new type of retirement plan is now available to businesses with less than 100 employees. The new plan is called “SIMPLE” and it is easy addition to the employee benefits for almost any small business. The Small Business Protection Act of 1996 first made this plan available and the name stands for Savings Incentive Match Plan for Employees. It can be designed as either an IRA or a 401(k) plan and is much less expensive for an employer than other types of plans.
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Here are the key provisions:
1.Employees can contribute any amount up to $6,500 of pay.
2.One-person businesses are eligible.
3.Part-time and hobby businesses are eligible.
4.The money can go into any type of self-directed accounts titled as IRAs or 401(k) accounts for each participant. This includes stocks, mutual funds, banks, annuities, etc.
5.All accounts are 100% vested immediately. This means that all of the money belongs to the employee; the employer cannot touch it under any circumstances.
6.Employers may contribute in any of the following three ways:
a) Match each employee’s voluntary contribution dollar for dollar up to the first 3% of the employee’s pay. No employer contribution is required if the employee does not voluntarily contribute.
b)Match 1% of pay in 2 out of 5 years after notifying employees (if using an IRA account).
c)Contribute 2% of pay for each employee, regardless of whether the employee makes voluntary contributions or not.
7.Normal retirement distributions will be handled in a manner similar to current IRA rules.
8.Premature distributions during the first two years of participation in the plan will be taxed at 25% instead of the usual 10% tax penalty.
9.This plan cannot be combined with any other employer sponsored retirement plan.
10.Any form of business entity or non-profit organization may establish a SIMPLE plan, except state and local governments.
11.Plans can be established at any time of the year before October 1. Plans may not be started in October, November or December.
12.Administration requirements are minimal, averaging about one hour per employee.
The SIMPLE plan will be
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very helpful for small firms that want a retirement plan with minimum hassle or and minimum cost. In recent years a number of companies with less than 100 employees have started traditional 401(k) plans but then found that they did not get the results they expected from the plan. These firms are statistically too small to support a 401(k) plan with their cumbersome set of rules and restrictions. In addition, 401(k) plan administrative costs often ran much higher than the employer originally expected. Many of these companies now unhappy with the cost or service with their current 401(k) plans are expected to switch to the new SIMPLE plan.
Another advantage is that SIMPLE plans can be funded with no-load mutual funds chosen by the investor that result in significant saving to employees over time. In contrast, most 401(k) plans use heavily commissioned investments or charge substantial administration fees.
SIMPLE plans can be an effective tax saving tool for business owners. A high-income business owner could save up to $5,500 in taxes in a single year on contributions of up to $13,000 in his own account without making contributions to other employee’s accounts if other employees decline to participate. (Typical tax savings are $2,000 per year for a middle-income participant). This tax benefit favoring the owner is not possible with the other types of retirement plans available today.
The employer’s cost for matching contributions in a SIMPLE plan currently averages about $600 per year per employee because not all of the employees will participate in the plan. This is far less than the cost of most 401(k) or SEP plans.
If an employee contributes only $25 per week (with contributions matched by the employer) the account will grow to provide a retirement income of about $125 per week after just 10 years of contributions.
About the Author
Tony Novak, MBA, MT is a writer and financial adviser in Narberth, PA focusing on tax and employee benefit issues. His businesses www.MedSave.com and Freedom Benefits Association provide online benefits enrollment for thousands of individuals and businesses nationwide.
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