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An Employer’s Guide to SIMPLE-IRA Retirement Plans(Savings
Incentive Match Plan for Employees) Qualifying Employers
SIMPLE plans are available to employers with 100 or fewer employees who earned at least $5,000 in the prior year. Employers cannot qualify to establish a SIMPLE plan if they have another retirement plan (unless that plan is solely for employees covered by a collective bargaining agreement). When to Setup a SIMPLE Plan
Generally, employers may establish a SIMPLE plan any time between January 1 and October 1. A new company created after October 1 is allowed to setup a plan “as soon as administratively feasible”. Employer Matching Contribution RequirementsEmployees may defer up to $6,500 each year (indexed for inflation, see Changes Arising from the 2001 Tax Act) with no percentage limitation (i.e. an employee with $6,500 in total compensation for the year may contribute the entire amount, less social security taxes, to the plan). Employers must also contribute to the plan. Employers may choose annually to match employee contributions (up to 3% of the employees’ salary) or contribute a flat non-elective 2% for all eligible employees, regardless of whether they choose to contribute. For example, if the employer matches contributions up to 3%:
Or, if the employer contributes a non-elective 2%:
Matching and non-elective contributions must be made by the due date of the employer’s income tax return including extensions (if applicable). Employers can elect a matching contribution of less than 3% of employee’s compensation, but only for two out of every five years (this election must be made and communicated to employees before the beginning of the election period). Employee EligiblityGenerally, employees who earned at least $5,000 for any two prior years and is expected to earn at least $5,000 in the current year is eligible to participate in the SIMPLE plan. Employers can choose to have less restrictive eligibility requirements, such as:
Employees are not required to participate and may elect not to contribute to the plan. For those employees who do participate, their contributions are considered pre-tax contributions. Setting up SIMPLE-IRAs
SIMPLE-IRAs are the individual retirement accounts or annuities set up for employees into which the contributions are made. These accounts must be set up before the first date by which a contribution is required to be deposited into the account. Employee Notification RequirementEmployers must notify each employee of the following before the start of the election period (generally 60 days before the start of the year):
During this election period (after receiving the notification from the employer), employees may elect to begin, change, or discontinue their salary reduction contributions. It is our recommendation that employees be asked to sign an election form each year indicating whether they wish to participate and how much they wish to contribute. Even if the employee elects not to participate, the employer should still collect a signed election form from the employee (see accompanying sample). Filing RequirementsThere are no tax forms that are required to be filed with IRS (i.e. Form 5500 is not required). It is recommended that you keep your Form 5304-SIMPLE or 5305-SIMPLE on hand and update it yearly as well as the signed copies of employee notifications. Time Limit for Depositing Employees’ Salary Reduction Contributions
Because a SIMPLE plan involves salary reduction contributions, all such contributions must be made through the employer’s payroll system. Employer’s must deposit the employees’ contributions within 30 days after the end of the month in which employees would have been eligible to receive the funds in cash if they had not made the salary reduction election. Tax Treatment of ContributionsEmployers can deduct timely contributions in the tax year within which the calendar year for which contributions were made ends. For calendar year taxpayers, this means that employer-matching contributions made for 2001 would be deductible on their 2001 income tax return as long as the contributions were made by the due date of the tax return (including extensions). Employees exclude their salary reduction contributions from gross income. Those contributions are not subject to federal or State of Maine income taxes or withholding, but are subject to social security, medicare and unemployment taxes. Employee VestingAll contributions, regardless of whether they are employer or employee contributions, are immediately 100% vested. Changes Arising from the 2001 Tax ActIncreased maximum annual salary deferral contributionsPrior to the Act, the maximum deferral was $6,000. The maximums will now be:
The maximum will be indexed for inflation in $500 increments after 2005. Catch-Up ProvisionsThe Act introduced a catch-up provision for individuals at least 50 years old before the end of the plan year. The applicable catch-up amounts are:
Expected FeesMost trustees charge very minimal fees for maintenance of SIMPLE-IRA plans, generally less than $50 per year for each employee’s SIMPLE-IRA. These fees are generally charged against the employee’s account balance and the employer is generally not charge for account or plan maintenance. Self-Employed SIMPLE ParticipantsSelf-employed individuals who established and participate in a SIMPLE plan have until the due date of their individual tax return to calculate and make their contributions. The contributions are subject to the same maximum deferral amounts as apply to employees. Compensation for purposes of the SIMPLE Plan is the net earnings from self-employment (an adjustment is made for the self-employment tax). Self-employed individuals make contributions to their own plans up to the limits discussed above and also make the employer’s matching or non-elective contributions.
Maximum Compensation for Deferral/MatchingThe maximum dollar amount of compensation subject to deferral, matching, and non-elective contributions is $200,000 for 2002. So that an employer matching at 3% could contribute a maximum of $6,000 to an employee's SIMPLE-IRA if that employee earned $250,000 and deferred $7,000.
Please contact us if you have any questions regarding SIMPLE IRAs or other retirement plan options.
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