Savings Incentive Match Plans for Employers or Simple IRAs are retirement plans established by employers – including the self-employed, sole proprietorships, partnerships, not-for-profits and incorporated business owners as an alternative to the more common 401(k) plan. Employers are required to contribute to the plan, regardless of the employee’s contribution to the plan. These contributions may come in the form of a dollar-for-dollar elective match on employee contributions or a non-elective contribution. Employee contributions are pretax income, often called Salary Deferral.
To establish a Simple IRA plan, an employer must develop a plan document spelling out details of the Plan. This is often done in conjunction with the investment company the employer uses to manage the plan. The U.S. Government establishes a minimum income level to dictate who must be allowed to participate and receive employer contributions. This income amount increases annually with inflation. These types of plans are most often set up by smaller (under 100 employees) businesses as they are simpler to administer than other plans and it gives the employee the ability to contribute to their retirement as well.
The U.S. Government establishes the contribution limits for Simple IRAs. An employee may contribute 100% of their income to the plan up to that limit. The employer may contribute a dollar-for-dollar elective match on employee contributions of up to 3% of compensation or a non-elective contribution of 2% of compensation for those employees who choose not to contribute to the plan. Contribution into the plan are deductible to both the employee and employer and the contributions will grow tax-deferred until withdrawn. All employer contributions to the employee are 100% vested upon contribution. New SIMPLE IRA plans must be adopted by October 1 of the tax year.
During the first two years after an employee’s SIMPLE IRA is established, assets held in the SIMPLE IRA must not be transferred to another retirement plan. This two-year period begins the first day the employer deposits a contribution.
Distributions that occur before the age of 59.5 are subject to a 10% early-withdrawal penalty. This 10% penalty is increased to 25% if the individual receives a distribution within two years of the first contribution made to his or her SIMPLE IRA account. The 10% penalty is in addition to any income tax owed on the amount. There are some instances where these penalties may be waived by the IRS for qualified purposes.
For more information on how Simple IRAs can play a valuable role for your business or your personal financial plan, speak with a Trilogy Advisor.