This is the second installment of a series of articles designed for the small business owner who may be contemplating the plethora of business retirement plans available.

I like simplicity.   I especially like it when I can help my clients in a simple way so that the decision they make is simple, the product I offer them is simple to understand and simple to explain and the benefits are many for both the employer and employee.

Ladies and Gentlemen: I give you the SIMPLE IRA.  

Yes, SIMPLE is an acronym for Savings Incentive Match Plan for Employees of Small Employers.   A SIMPLE IRA provides employers and their employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. And compared to other types of retirement plans,
SIMPLE IRA plans offer lower start-up and annual costs ‘¦ they are just simpler to operate.

If you own a company with fewer than 100 employees and want to give your employees a monetary benefit as incentive to contribute to their own retirement plan, a SIMPLE IRA might be a good move.   Furthermore, should you simply want to give to employees retirement without them participating at all, you may have that option as well.   SIMPLE IRAs must be established by the first of October so as to give a 60 day communication notice to your employees and must be communicated as such.   But this is simply a great way to keep your benefits in front of your employees as well as to remain in compliance with communications about retirement plan options.

First, the incentive plan.  

Employees who participate in the plan are eligible if they have fulfilled at least one year of service (you can exclude up to two years of service, but every employee must play by the same rules) and at least $5,000 of income in the prior year (you can also exclude based on age ‘“ under 21, but you must be consistent).   This gives you, the employer, the option of excluding some of your young, part-time or seasonal workers who may not be with you long, but again, you must be consistent.   If the rules apply to one, they must apply consistently to all.

The incentive is a match – the M in SIMPLE.   By matching employees who participate and contribute to their plans, you may be eligible for a tax-deduction on the amount you give to your employees.   The Match portion is an ‘œup-to’ scenario, where as the employer, you give (dollar-for-dollar) up to 3% of the employees income.   Meaning, if the employee contributes 3% of his or her income, you contribute the same amount.   Should the employee only contribute 1.75% of his or her income, this is your only obligation.   (Anything more than 3%, employers need only contribute 3%).   This gives an incentive to the employee to not only participate, but receive at least $3 for every $100 they earn in free money.

Under this option, employees must contribute to receive.   Simple.

What’s even better for the employer is that the IRS figures a small business is profitable three out of every five years and will allow the match to drop from the 3% to just 1% for the other two.   Check with your accountant or qualified tax advisor for more information.

There is also the same plan for employers who want to give to their employees, regardless of whether or not the employees participate.   Rarely does this happen for my clients, but should you as an employer determine you wish to contribute to your employees’ retirement plans, even if they don’t, you can.   Across the board, employers who exercise this option contribute 2% of all eligible participants’ income to their respective accounts.   Tax deductions, lower turnover and higher employee morale, oh my!   We have all three in the SIMPLE IRA.

Each year, you can choose which incentive you will use for the next year’s contributions. This choice is part of the information you are required to communicate to employees before the beginning of the 60-day election period.   Look at it as another way to let them know how much you care.

With almost every mutual fund company offering the SIMPLE IRA, including socially responsible investment companies, you and your employees will have numerous investment options available (and good thing, it’s the law!) so as to diversify your asset allocation strategy.   By simply subtracting the monies from their pre-tax income and depositing funds into the respective accounts of participating employees within the month they are subtracted, (which is even simpler because most mutual fund companies now offer this benefit electronically/online) you have fulfilled most of your obligation as an employer.   Each eligible employee must be allowed to participate when they become eligible and you must match everyone who is eligible (in other words, be fair, open and honest and don’t discriminate, and you should be ok).     Most plans are just $15 per employee, paid by the employee, and cost the employer little aside from the time (which, after you get the hang of it, isn’t much) and the matching dollars.

Contribution limits.

Participants select a percentage of their annual salaries or a flat dollar amount to contribute through payroll deduction. Employees may defer up to 100% of their income, with a maximum contribution of $10,500 a year. In addition, participants age 50 or older may make catch-up contributions of up to $2,500 annually.

This is simple for those who are:

  • Business owners who don’t want the complexity, cost and detailed administration of a 401(k).
  • Stores, restaurants and professional firms; freelancers, moonlighters and independent contractors.
  • Those who are already covered by a retirement plan at a full-time job are eligible to contribute to a SIMPLE IRA if they have self-employment income.

So, if you want a simple retirement alternative to the spendy 401(k) while offering an incentive to remain loyal to your company, check out the SIMPLE IRA.   It may be simpler than you think!   Check with your financial advisor to determine if the SIMPLE IRA is right for your company.