Starting Slow With a Simple IRA
For certain employers, particularly small businesses, introducing a retirement plan for employees may seem like a daunting task. The company owner may feel that providing a full-blown 401(k) plan is his or her only choice, but that’s far from true.
There are other options to consider that are relatively easier to administer and usually less costly to set up and maintain. One such plan is a SIMPLE IRA.
Requirements and Restrictions
The acronym SIMPLE stands for “Savings Incentive Match Plan for Employees.” (And, of course, IRA stands for “individual retirement account.”) The concept behind these plans is to allow employers with 100 or fewer employees to provide a retirement plan without running into the often-confusing complexities of 401(k) plans. A SIMPLE IRA may even be a viable option for self-employed individuals.
Naturally, these plans still have some requirements and restrictions. Although eligible employees may contribute to their accounts themselves — which isn’t the case for pensions, for example — those annual contributions are less than those allowed for 401(k)s. In 2018, an employee can contribute up to $12,500, or up to $15,500 if the employee is 50 or older. (As of this writing, these amounts for 2019 had not yet been announced.)
There’s also a required match from the employer. Generally, you must choose between:
- Matching contributions of up to 3% of an employee’s compensation, or
- Nonelective contributions of 2% of an eligible employee’s compensation.
An employer’s contributions are tax-deductible and employee contributions are made on a pretax basis. Thus, the payment of taxes is deferred until distributions begin.
If you have no plan, you might want to consider a SIMPLE 401(k) plan. These are like SIMPLE IRAs when it comes to contribution limits and employer matching, but participants in a SIMPLE 401(k) may take out loans. Some organizations have employees who really appreciate this feature, though it makes plan administration a little more challenging for the employer.
Under either of the SIMPLE offerings, employers avoid the nondiscrimination tests — a key component of regular 401(k) plans. (These tests, which involve a calculation based on the organization’s employees, may serve to restrict the allowable contributions of higher-earning employees unless there’s a sufficient level of participation by those earning less.)
A Critical Step
Please note that the deadline for setting up a SIMPLE IRA for 2018 has already passed. But you could begin exploring the idea now with an eye toward establishing this or another retirement plan for your employees for next year. To discuss further, please contact us.