What Is a SIMPLE Retirement Account?

There are many questions and misconceptions about what a SIMPLE retirement plan is.

One of the options for small businesses to help provide a retirement account for their employees is the SIMPLE Plan. This is a retirement account that leaves the contribution amounts up to the employees themselves. The SIMPLE plan is one of the easiest and least expensive accounts to set up as it skips the use of a broker, and the sign up process consists of a few pages.

The SIMPLE IRA Plan Defined

"SIMPLE" stands for Savings Incentive Match Plan for Employees of Small Businesses. The purpose of a SIMPLE plan is to give employers a choice when it comes to providing a retirement fund for their employees. There are two main choices in SIMPLE plans: the SIMPLE IRA plan and the SIMPLE 401(k) plan. The 401(k) plan allows an employer to make the SIMPLE contributions part of a 401(k) plan with all of the protections and rules as a 401(k) account. The IRA plan is simply a retirement account governed by the rules for an Individual Retirement Account.

The SIMPLE Plan Limitations

A SIMPLE IRA plan is geared towards small businesses, giving employers the option of choosing a retirement plan that employees have some responsibility for participating in. The plan has limitations, though. The first is the number of employees. An employer cannot participate in this plan if there were more than 100 employees who received $5,000 or more in compensation from the previous year. This includes all employees, whether or not they were eligible to participate. The second limitation is that the same business cannot maintain another qualified plan for employee retirement.

Contributions to The SIMPLE Retirement Account

There are two options for contributing to each employee's SIMPLE plan. First, the employer must either contribute a 2 percent non-elective amount of each employee's compensation or up to a 3 percent dollar for dollar matching contribution. The maximum amount that may be contributed per year is $11,500. An additional $2,500 "catch-up" contribution for those employees over the age of 50 is allowed, similar to the "catch-up" contributions for other types of IRAs.

Timeliness of the Contributions

If the employees choose the matching contribution option, the portion they request up to the 3 percent limit must be withheld from their paychecks each payroll period. The deposits of these contributions must be placed in the employees' SIMPLE accounts within the 30-day period following each pay day. The employer's portion of the contribution or matching contribution must be made before the due date of the business's tax return. This would be March 15 for corporations and April 15 for sole proprietorships and partnerships.

Annual Requirements for Participation in the SIMPLE Plan

Small businesses that participate in a SIMPLE plan must have less than 100 employees each year to remain in it. For businesses that are currently in a SIMPLE plan that due to growth exceed 100 employees, there is a two-year grace period during which employers may choose to find another plan or dismiss some employees to stay under that limit. Each year Form 5500 must be filed with the IRS for all SIMPLE participating businesses to report the amounts contributed for each employee.

References

• Internal Revenue Service: Choosing a Retirement Plan--SIMPLE IRA plan
• Internal Revenue Service: Publication 4284--Simple IRA Plan Checklist (PDF)
• Internal Revenue Service: Choosing a Retirement Plan--SIMPLE 401(k) Plan (PDF)
• Internal Revenue Service: FAQ Regarding SIMPLE IRA Plans
• Internal Revenue Service: Publication 560 Retirement Plans for Small Business (PDF)