Savings Incentive Match Plan For Employees Made "Simple"

                                     

The Savings Incentive Match PLan for Employees, otherwise known as SIMPLE IRA, is a retirement option that is usually utilized by small employers, sole proprietorships and partnerships. Any business that is without a current retirement plan and employs less than 100 employees, each of whom with earnings of atleast $5,000 every year for the past 2 years, can establish a SIMPLE IRA. It is an uncomplicated system that is very inexpensive to set up and easier to manage compared to other types of retirement plans. In this type of IRA, the employers match contributions by participants (employees) dollar for dollar up to a maximum of 3% of the contributor's earnings for the year. The employers however, can elect to match 2% of the annual income regardless of how much the employee contributes. They may also choose to reduce that value to a minimum of 1% but they can only do this twice in every 5 years. SIMPLE IRA contributions by partners and sole proprietors have some slight differences over normal employer - employee contributions in terms of taxes.

                                    

Although there is no filing requirement for the employer, there are still a few steps to follow when establishing a SIMPLE IRA. The first step is issuing a written agreement to provide a retirement plan to all qualified employees. The main requirement participants need is having been able to earn atleast $5,000 every year for the preceding 2 years since the plan's inception. There are two basic forms you can use to set up a SIMPLE IRA. The Form 5304-SIMPLE allows employees to choose which financial institution will receive and hold their contributions in trust. If the financial institution is chosen by the employer then the Form 5305-SIMPLE is used. Alternative documents like the ones issued by banks and insurance companies may also be used. The second step is providing employees with all the information they need to have regarding the plan and their options. This includes salary reduction options with the plan. SIMPLE IRA contributions by partners should be clarified as well since there are some tax differences with regards to self owned businesses. The third step is to set up a SIMPLE IRA for each participant. The financial institutions that receive and hold the contributions have different options the participants can choose from like stocks, bonds and mutual funds.


The SIMPLE IRA, like any normal retirement plan, has its share of advantages and disadvantages. The funds in the accounts are individually and fully owned by the employees and like other types of IRA there are some restrictions when it comes to loans and withdrawals. With SIMPLE IRAs, loans from the accounts are not permitted. Withdrawals before the age of 59 1/2 incur a penalty of 10% which is then increased to 25% if it occurs less than 2 years after the account has been set up. This type of plan also has limited choices when it comes to investment options and the amount contributed by a participant annually cannot exceed $11,500. One of the best things for an employer about this plan is, as the name implies, that it is simple to set up and implement. The employees share the responsibility of the retirement accounts with their employers. SIMPLE IRA contributions by partners and its taxation should be revised in the future but overall this plan is well balanced to provide more financial stability for the employees' futures. 

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