Small Business Retirement Series: The Simple IRA
As a small business owner, just thinking of setting up a workplace retirement plan is probably giving you nightmares. The additional benefits can be great for attracting and retaining talent, helpful for your employees and even provide your business with great tax deductions AND credits.
But retirement plans also come with administrative work and increased company liability. There may be additional IRS filings, new rules and laws to follow and further obligations you are legally required to comply with (such as your new fiduciary duty to your employees).
Thankfully, the IRS has done a few good things when it comes to small business retirement plans, and the SIMPLE IRA is one example.
This guide is broken down into several main sections (click on a link to jump to a specific section)
What is a Simple IRA?
A Savings Incentive Match Plan for Employees (SIMPLE) is a basic retirement plan available to businesses with 100 employees or less.
A Simple retirement plan does not have a lot of options or flexibility. However, because of that it can be set up very easily and requires very little administrative work and upkeep.
A Simple plan allows the business two different options for contributing towards employee accounts:
1) Matching contributions up to 3% of employee compensation.* Or,
2) Pay 2% of an employee salary into their Simple account, regardless if they contribute or not.
* A business may lower to match to as low as 1% for up to 2 years in any 5 year period.
Employees may contribute up to $12,500 per year into the account, or $15,500 if age 50 or older.
To give examples of the two options:
Example 1: Your business plans to match 3% of employee compensation into their Simple IRAs (Option 1 above).
Josh, an employee with a salary of $45,000 contributes 5% of his salary ($2,250) each year. Therefore, your business would match the first 3% of Josh’s contributions and contribute an additional 3% ($1,350) into Josh’s account.
Sarah, another employee with a $45,000 salary does not contribute to their Simple IRA at all. For her, you have no obligation to contribute anything to Sarah’s account.
Example 2: This time, your business elects to do a 2% non-elective contribution to each employee account (Option 2 above).
Just like example 1, Josh saves 5% ($2,250) of his $45,000 salary into his Simple IRA. Your business would contribute 2% ($900) into Josh’s account.
Sarah, who contributed nothing herself, will also receive 2% ($900) of her salary into her Simple IRA via company contribution.
How to Setup and Administer a Simple IRA
To setup a Simple IRA plan for your business, contact a financial advisor or financial institution to begin. For business owners who go through Hylland Capital for plan setup, we work with TD Ameritrade to setup and manage your SIMPLE IRA.
Simple IRAs require no additional annual filings to the IRS (No Form 5500). Hylland Capital and TD Ameritrade will report all necessary information to the IRS. The business is only required to note employee contributions to a SIMPLE IRA on their W-2.
Besides adding the information onto W-2s, business have a couple other annual obligations:
Each year, the business can choose how they would like to contribute to employee accounts. They can either choose between a 3% match or a non-elective 2% contribution.
Each year, the employer must offer at least a 60 day period in which employees can change their contributions for the next year. Generally this is November 2nd through December 31st.
The business must notify employees how they will contribute to their Simple IRAs PRIOR TO the 60 day period where employees can change their contributions.
The IRS, Hylland Capital Management and/or TD Ameritrade (or your financial institution) has templates for all of these required notifications. Hylland Capital will also assist businesses in staying compliant with IRS rules.
SIMPLE IRA plans must be set up by October 1st or “as soon as possible” if the business is incorporated after October 1st.
Tax Deductions, Credits and Benefits to Employers Who Offer a Simple IRA Plan
Setting up a Simple IRA plan for your employees also provides tax benefits for the company.
First, all employer contributions are tax deductible for the tax year in which they are made. If your business contributed a total of $10,000 to employee Simple IRA accounts, the business may deduct $10,000.
Second, there is a tax credit of up to $500 available for businesses who start a Simple IRA plan. The credit goes towards costs to set up, administer AND educate employees and can be claimed for 3 years. That’s a credit of up to $1,500 for your business!
A Simple IRA will have the same tax advantages for your employees as other IRA style retirement accounts. Contributions that are made by employees come out of their pay before taxes and will grow tax deferred.
Pros and Cons of Simple IRA Plans
Simple IRA plans are useful because of their ease to set up and administer. However, that lack of complexity also means they have a few less features than other retirement plans available.
· Easy to set up
· Very low administrative costs
· Tax credit available to recoup startup, administrative and education costs.
· Inflexible match options.
· Lower annual contribution limit for employees ($12,500 vs $18,000 for 401(k)s).
· 25% penalty for employees who withdrawal money after less than 2 years. After 2 years, the penalty drops to 10%.
Other features of note (may be a positive or a negative depending on your business)
· Your employees are not able to take loans out against their Simple IRA balance. Simple 401(k)s do exist that allow for this option, but this also opens the business up to additional administrative work.
· If a business has a Simple IRA established, generally it must be the only retirement plan that your business makes contributions to. For example, you can not have a Simple IRA and Profit Sharing Plan at the same time.
· If your business grows to more than 100 employees, you have up to 2 years to set up a new retirement plan.
· All contributions made by the business to employee accounts are immediately vested. With a Simple IRA plan you can not set up a vesting schedule for employees.
Services provided by Hylland Capital Management for Small Business Retirement Plans.
Hylland Capital Management can help you set up the plan, educate employees and keep you compliant with annual disclosure requirements. All fees are tax deductible and will qualify for up to $1,500 in tax credits for the first 3 years of your plan.
Not sure if a Simple IRA is the best course for your small business? Let’s chat and find the best option for you: