The SIMPLE IRA Plan: a Retirement Plan for Small Employers
By Lisa Walker, CISP, CHSP
Americans are more likely to save for retirement if they have a way to do so through work. Unfortunately, many private sector workers lack access to a workplace retirement plan. March 2018 Bureau of Labor Statistics data shows that approximately 45 percent of private industry employers with less than 50 employees offer a retirement plan, compared to 76 percent of employers with more than 50 but less than 100 employees.
It’s apparent that a substantial percentage of small businesses do not offer a retirement plan. This should come as no surprise, as many small employers perceive setting up and running a retirement plan as complicated and daunting. According to a past study by the U.S. Government Accountability Office, small employers often cite “plan complexity and resource constraints” as the most frequent “barriers to retirement plan sponsorship.”
Make It SIMPLE
Many of your small business owner clients may feel the same way. Perhaps they are not aware that there are retirement plans tailored for small businesses that they can offer their employees, such as a savings incentive match plan for employees of small employers (SIMPLE) IRA plan. A SIMPLE IRA plan combines a salary deferral feature with the simplicity of an IRA, while offering many of the same advantages of other types of employer-sponsored plans, such as a 401(k) plan, but generally easier and less expensive to maintain.
And the advantages don’t end there. Both the employer and its employees benefit in many ways.
Employer
Less expensive to maintain
Relief from fiduciary liability for investment performance
No nondiscrimination or coverage testing
No plan-level reporting (Form 5500)
Deductible employer contributions
Potential tax credit of up to 50 percent of plan start-up costs
Business owners receive contributions
Employees
Opportunity to save for retirement
Tax-deferred contributions and earnings until distributed
Can be converted to Roth IRA after two years
Employer funds contributions to the employee’s SIMPLE IRA
Employee owns the SIMPLE IRA contributions immediately
SIMPLE Eligibility
Almost any type of employer may establish a SIMPLE IRA plan: for-profit entities (sole proprietorships, partnerships, corporations); tax-exempt entities; and state and local governments (or any political subdivision). But an employer must satisfy certain eligibility requirements to offer this type of plan.
First, the employer cannot maintain another retirement plan, such as a 401(k) or a simplified employee pension (SEP) plan, in which its employees currently accrue benefits. Second, the employer must not employ more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year.
Employees who have earned $5,000 or more in compensation during any two preceding calendar years and are reasonably expected to earn at least $5,000 in compensation in the current year must be allowed to participate in the plan. An employer may choose less restrictive requirements (less compensation or fewer years).
There are no age restrictions for SIMPLE IRA plan participation, but an employer may exclude
collectively bargained (union) employees for whom retirement benefits were the subject of good-faith bargaining and
nonresident aliens with no U.S. income.
SIMPLE Contribution Options
An employer that is considering offering a SIMPLE IRA plan should be aware that employer contributions to each employee’s SIMPLE IRA are mandatory. An employer may either
match employee deferrals dollar-for-dollar up to three percent of compensation (or give a reduced match of between one and three percent in any two of the five preceding years), or
make a nonelective contribution for each eligible employee of two percent of the employee’s compensation, regardless of whether the employee defers.
The maximum amount that employees may defer into a SIMPLE IRA plan for 2019 is $13,000. Those age 50 or older may defer an additional $3,000 in catch-up contributions if the plan document allows (IRS model SIMPLE IRA plan documents do not allow an employer to exclude the option of making catch-up deferrals). Employee participation is voluntary and there is no maximum deferral percentage.
In deciding which employer contribution option best satisfies its objectives, an employer should consider the cost of maintaining the plan. The cost may change each year depending on the number of eligible employees, the employees’ compensation, and the number of employees who defer. It’s also worth noting that business owners can maximize their own contributions (within the statutory limits), even when no or few employees defer.
SIMPLE Set Up
A new SIMPLE IRA plan generally must be established by October 1 of the year in which deferrals will begin. Really, the employer may choose any date between January 1 and October 1 to establish a plan. A SIMPLE IRA plan must be operated on a calendar-year basis, regardless of whether the business runs on a calendar or fiscal year.
To establish a plan, the employer first decides whether to operate the plan through a designated financial institution (DFI) arrangement, which requires that SIMPLE IRA contributions for all employees be deposited at the same financial organization. If not working through a DFI, the employees may choose which financial organization receives their SIMPLE IRA plan contributions.
Next, the employer chooses whether to go with one of the two model documents—DFI or non-DFI—or a prototype plan document, which may offer more flexibility in its provisions. You may offer your small business clients any of these. A SIMPLE IRA plan document kit that also includes the plan’s required disclosures and notices often works well.
The employer then makes elections on the document and signs it, thus creating the plan. The employer must then provide its employees a SIMPLE IRA plan disclosure statement containing the general SIMPLE IRA plan rules and plan provisions.
In the meantime, eligible employees (including the business owner) must establish SIMPLE IRAs to receive their contributions, either at the DFI named for the plan or at financial organizations of their choosing, whichever is applicable. Each employee must complete and sign the SIMPLE IRA plan agreement or application that is provided. If an eligible employee that is entitled to a contribution is unwilling or unable to open a SIMPLE IRA before the date on which the contribution is required to be deposited, the employer executes the necessary documents to establish a SIMPLE IRA on the employee’s behalf with a financial organization of the employer’s choice.
Once the plan is established, the employer must provide employees a summary plan description and a deferral notice. The summary plan description must be given annually, outlining the procedures for and effects of withdrawals and transfers from the SIMPLE IRAs. The deferral notice allows employees to elect to begin deferrals or to change prior deferral elections.
The financial organizations holding the SIMPLE IRAs must report contributions and distributions to the IRS, and provide annual account statements, fair market value statements, and required minimum distribution statements to each SIMPLE IRA owner.
SIMPLE Does It
As simple as a SIMPLE IRA plan sounds, employers should consult their competent tax advisors or legal counsel to determine if a SIMPLE IRA plan is right for them. With all the great features and benefits, a SIMPLE IRA plan tends to be most suitable for small employers who are seeking a low-cost retirement plan with low-maintenance administration, and are willing to make modest annual contributions.
The key differentiator for your organization will be its willingness to educate both staff and small business clients about the rules and benefits of a SIMPLE IRA plan. But most importantly, your employer clients should be able to educate their employees on the plan’s value and what it means for their futures. Assisting employers, and, ultimately, their employees, by providing helpful information will lead to stronger business client relationships with your bank or credit union.
