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Thinking about a retirement plan? If it seems like the right thing for your
business, here’s a SIMPLE one.
A SIMPLE (Savings Incentive Match Plan for Employees of
Small Employers) IRA plan offers great advantages for
businesses that meet two basic criteria. First, your
business must have 100 or fewer employees (who earned
$5,000 or more during the preceding calendar year). In
addition, you cannot currently have another retirement
plan. If you are among the thousands of business owners
eligible for a SIMPLE IRA plan, read on to learn more.
A SIMPLE IRA plan provides you and your 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.
Other Advantages of a SIMPLE IRA Plan:
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SIMPLE IRA plans are easy to set up and run – your
financial institution handles most of the details.
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Employees can contribute, on a tax-deferred basis,
through convenient payroll deductions.
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You can choose either to match the employee
contributions of those who decide to participate or to
contribute a fixed percentage of all eligible
employees’ pay.
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You may be eligible for a tax credit of up to $500
per year for each of the first 3 years for the cost of
starting a SIMPLE IRA plan. (IRS Form 8881, Credit
for Small Employer Pension Plan Startup Costs).
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Administrative costs are low.
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You are not required to file annual financial
reports.
Starting a SIMPLE IRA plan is easy to do!
Step 1: Contact a retirement plan professional
or a representative of a financial institution that offers
retirement plans. Many financial institutions will
probably have a pre-approved SIMPLE IRA plan form that you
can review.
Step 2: Choosing a financial institution to
maintain employees' SIMPLE IRAs is one of the most
important decisions you will make, since that entity
becomes a trustee to the plan. (Alternatively, you can
decide to let employees choose the financial institution
that will receive their contributions.)
Regardless of who makes the choice, only the following
institutions can be designated as trustees of SIMPLE IRA
plans: banks, mutual funds, insurance companies that issue
annuity contracts, and certain other financial
institutions that have been approved by the IRS. Trustees
agree to:
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Receive and invest contributions, and
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Provide the employer with a summary
description of the plan features each year.
Step 3: Choose a model form or other plan
document offered by your financial institution. If your
financial institution offers a model SIMPLE IRA plan
document, you will have a choice of two forms to use:
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IRS Form 5304-SIMPLE, Savings
Incentive Match Plan for Employees of Small Employers
(SIMPLE) - Not for Use With a Designated Financial
Institution, or
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IRS Form 5305-SIMPLE, Savings
Incentive Match Plan for Employees of Small Employers
(SIMPLE) - for Use With a Designated Financial
Institution.
The model form you use will depend on whether you
decide to select the financial institution that will
receive contributions or to let your employees select
their financial institutions.
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If employees are allowed to select
the financial institutions that will receive their
SIMPLE IRA plan contributions, you will fill out Form
5304-SIMPLE.
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If you require that all contributions
under the SIMPLE IRA plan be initially deposited with
a designated financial institution, you will fill out
Form 5305-SIMPLE.
Your choice of the employees covered will be set out in
your selected plan document. You can choose to cover all
employees without restriction. Alternatively, you can
limit the employees covered to those who received at least
$5,000 in compensation during any 2 years prior to the
current calendar year and who are reasonably expected to
receive at least $5,000 during the current calendar year.
Step 4: Complete and sign the selected IRS form
(or other plan document, if not using a model form). When
it is completed and signed, this document becomes the plan’s
basic legal document, describing your employees’ rights
and benefits. Do not send it to the IRS; instead keep it
handy. You will want to check periodically to see that the
plan is kept up to date with the law.
A SIMPLE IRA plan is true to its name when it comes to
plan operation. Contributions under the plan (employees'
and yours) are simply deposited into IRAs.
Participants in a SIMPLE IRA Plan
Employees who elect to make contributions or to whose
accounts you deposit contributions are participants. Your
obligation is to provide information to your financial
institution on those employees who can participate as
described in your plan document. You will want to keep
your financial institution aware of any changes in the
status of those employees who can participate (for
example, new employees).
Enrolling Employees in a SIMPLE IRA Plan
SIMPLE IRA plans operate on a calendar-year basis. An
employer may initially set up a SIMPLE IRA plan as late as
October 1.
A SIMPLE IRA must be set up for each employee with
contributions under the plan . Employees must receive
notice of their right to participate, to make salary
reduction contributions, and to receive employer
contributions. In addition, employees must receive
information about the plan, including a copy of the
summary description. The required notice also informs
employees of the plan’s election periods during which
eligible employees can decide to contribute to the plan.
For employers that use one of the model forms, page 3 of
Form 5304-SIMPLE and page 3 of Form 5305 SIMPLE contain a
model notice.
Employee Contributions
Employees can make salary reduction contributions in
any amount to a SIMPLE IRA plan up to the legal limits.
The maximum amount that an employee can contribute is
$10,500 in 2007. (This amount is subject to cost-of-living
adjustments for years after 2007.) Additional employee
contributions (known as catch-up contributions) are
allowed for employees age 50 or over. The additional
contribution limit is $2,500 in 2007. (This amount is
subject to cost-of-living adjustments for years after
2007.)
Each year, employees can change their contribution
levels during the plan’s election period. This election
period must be at least 60 days long, and employees must
receive prior notice about an upcoming election
opportunity. SIMPLE IRA plans that have already been
established must have an annual election period that
extends from November 2 to December 31. A plan can have
more election periods each year in addition to this 60-day
election period.
Employer Contributions
You have two choices in determining your contributions
to the SIMPLE IRA plan:
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A 2 percent nonelective employer
contribution, where employees eligible to participate
receive an employer contribution equal to 2 percent of
their compensation (limited to $225,000 in 2007 and
subject to cost-of-living adjustments for later
years), regardless of whether they make their own
contributions.
-
A dollar-for-dollar match up to 3
percent of compensation, where only the participating
employees who have elected to make contributions will
receive an employer contribution, i.e., the matching
contribution.
Each year, you can choose which one 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.
Depositing and Investing Plan Contributions
Employee contributions must be deposited in the
financial institution serving as trustee for the plan
within 30 days after the end of the month in which the
amounts would otherwise have been payable to the employee
in cash. Your employer contributions must be made by the
due date (including extensions) for filing your business’s
Federal income tax return for the year.
After forwarding the SIMPLE IRA plan contributions to
the trustee, the trustee will invest the funds, in many
cases at the direction of the participants. SIMPLE IRAs
can be invested in stocks, bonds, mutual funds, and
similar types of investments. Employee and employer
contributions are always 100 percent vested—that is, the
money an employee has put aside plus employer
contributions and earnings from investments cannot be
forfeited. Employees can move their SIMPLE IRA assets from
one SIMPLE IRA plan to another in accordance with the
procedures of the financial institution.
Example 1: Elizabeth works for the Rockland Quarry
Company, a small business with 50 employees.
Rockland has decided to establish a SIMPLE IRA
plan for all its employees and will match its
employees’ contributions dollar-for-dollar up to
3 percent of each employee’s salary. Under this
option, if a Rockland employee does not contribute
to his or her SIMPLE IRA, then that employee does
not receive any matching employer contributions
from Rockland.
Elizabeth has a yearly salary of $50,000 and
decides to contribute 5 percent of her salary to
her SIMPLE IRA. Elizabeth’s yearly contribution
is $2,500 (5 percent of $50,000). The Rockland
matching contribution is $1,500 (3 percent of
$50,000). Therefore, the total contribution to
Elizabeth’s SIMPLE IRA that year is $4,000 (her
$2,500 contribution plus the $1,500 contribution
from Rockland). The financial institution
partnering with Rockland on the SIMPLE IRA has
several investment choices and Elizabeth is free
to pick and choose which ones suit her best.
Example 2: Austin works for the Skidmore Tire Company, a
small business with 75 employees. Skidmore has
decided to establish a SIMPLE IRA plan for all its
employees and will make a 2 percent nonelective
contribution for each of its employees. Under this
option, even if an eligible Skidmore employee does
not contribute to his or her SIMPLE IRA, that
employee would still receive an employer
nonelective contribution to his or her SIMPLE IRA
equal to 2 percent of salary.
Austin has a yearly salary of $40,000 and has
decided that this year he simply cannot make a
contribution to his SIMPLE IRA. Even though Austin
does not make a contribution this year, Skidmore
must make a nonelective contribution of $800 (2
percent of $40,000). The financial institution
partnering with Skidmore on the SIMPLE IRA has
several investment choices, and Austin has the
same investment options as the other plan
participants. |
Communicating With Employees
There are two key disclosure documents that keep
participants informed about the basics of how the plan
operates, inform them of changes in the plan’s structure
and operation, and provide them a chance to make decisions
and take timely action with respect to their accounts.
The summary description is a
plain-language explanation of the plan and is
comprehensive enough to inform participants of their
rights and responsibilities under the plan. It also
informs participants about the features of the plan. This
document is usually provided by the financial institution
and is given to participants at the plan’s inception,
when employees first join the plan, and annually
thereafter.
A summary description must include:
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The names and addresses of the
employer and trustee,
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A description of the requirements for
eligibility to participate,
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The benefits provided,
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The time and method of making salary
elections, and
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The procedure for, and effects of,
withdrawals and rollovers (including the penalties for
early withdrawals).
You can satisfy the summary description requirement by
providing employees with the most recent copy of IRS Form
5304-SIMPLE or 5305-SIMPLE provided by the financial
institution (if one of these model forms is used to
establish the SIMPLE IRA plan), along with the financial
institution's procedures for withdrawals and transfers.
Each year, in addition to the information above,
employees must receive an annual election notice
describing their right to make salary reduction
contributions and your decision to make either matching or
nonelective contributions for the following year. For
employers that use one of the model forms, page 3 of Form
5304-SIMPLE and page 3 of Form 5305-SIMPLE contain a Model
Notification to Eligible Employees that can be used to
provide this information to employees.
Every year, during the 60-day election period at the
end of the year, employees must be given the opportunity
to enter into a salary reduction agreement or to modify an
existing agreement.
Reporting to the Government
SIMPLE IRA plans are not required to file annual
financial reports with the government.
Distributions from the plan are reported by the
financial institution making the distribution to both the
IRS and the recipients of the distributions on Form 1099-R,
Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc.
The financial institution/trustee handling the SIMPLE
IRAs provides the IRS and participants with an annual
statement containing contribution and fair market value
information on Form 5498, Individual Retirement
Arrangement Contribution Information.
SIMPLE IRA contributions are not included in the “Wages,
tips, other compensation” box of Form W-2, Wage and
Tax Statement. However, salary reduction contributions
must be included in the boxes for Social Security and
Medicare wages.
When Employees Want to Stop Contributions
Employees may elect to terminate their salary reduction
contributions to a SIMPLE IRA plan at any time. If they do
so, the SIMPLE IRA plan may preclude them from resuming
salary reduction contributions until the beginning of the
next calendar year. Employers that are making nonelective
employer contributions must continue to make them on
behalf of these employees.
Distributions
Participants cannot take loans from their SIMPLE IRAs.
SIMPLE IRA contributions and earnings can be withdrawn
at any time. When participants take a distribution, they
typically can elect to:
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Take a lump sum distribution of their
account, or
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Roll over their account to an IRA or
another employer’s retirement plan.
Distributions from a SIMPLE IRA are generally subject
to income tax for the year in which they are received. If
a participant takes a withdrawal from a SIMPLE IRA before
age 59½, generally a 10 percent additional tax applies.
If such withdrawal occurs within 2 years of beginning
participation, the 10 percent tax is increased to 25
percent.
SIMPLE IRA contributions and earnings may be rolled
over tax-free from one SIMPLE IRA to another. A tax-free
rollover may also be made from a SIMPLE IRA to another
type of IRA, or to another employer’s qualified plan,
after 2 years of beginning participation in the original
plan.
A specific minimum amount of SIMPLE IRA contributions
and earnings is required to be distributed by April 1 of
the year following the year the participant reaches age
70½. After this initial year, the participant must
receive a required minimum distribution for each year by
December 31 of that year. (For further details regarding
the required minimum distribution amount, see IRS
Publication 590, Individual Retirement Arrangements
(IRAs).)
Monitoring the Trustee
As the plan sponsor, you should monitor the trustee to
assure that it is doing everything that it is required to
do. You should also ensure that the trustee’s fees are
reasonable for the services it is providing. If the
trustee is not doing its job properly, or if its fees are
not reasonable, you should consider replacing the trustee.
Although SIMPLE IRA plans are established with the
intention of being ongoing, the time may come when a
SIMPLE IRA plan no longer suits the purposes of your
business. When that happens, consult with your financial
institution to determine if another type of retirement
plan might be a better alternative.
To terminate a SIMPLE IRA plan, notify the financial
institution that you will not make a contribution for the
next calendar year and that you want to terminate the
contract or agreement.
You must also notify your employees that the SIMPLE IRA
plan will be discontinued.
You do not need to give any notice to the IRS that the
SIMPLE IRA plan has been terminated.
Even with the best intentions, mistakes in plan
operation can still happen. The U.S. Department of Labor
and the IRS have correction programs to help SIMPLE IRA
plan sponsors correct plan errors, protect participants,
and keep the plan’s tax benefits. These programs are
structured to encourage you to correct the errors early.
Periodically reviewing the plan makes it easier to spot
and correct mistakes in plan operation. See the Resources
section for further information.
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Choose a financial institution to set up your
SIMPLE IRA plan.
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Enroll your employees and start salary
reduction contributions.
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Deposit contributions timely.
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Tell your employees about their rights under
the plan .
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Monitor your trustee.
The U.S. Department of Labor’s (DOL’s) Employee
Benefits Security Administration and the IRS feature this
booklet and additional information on retirement plans on
their Web sites:
www.dol.gov/ebsa - Click on “Compliance Assistance
for Small Employers” and on “Publications/Reports”
for information to help you understand and operate your
SIMPLE IRA plan. This Web site also has information to
help your employees understand the importance of saving
for retirement.
www.irs.gov/ep - Click on “Plan Sponsor/Employer.”
This Web site is filled with plain-language information
that will help you maintain your SIMPLE IRA plan properly.
All the IRS forms and publications mentioned in this
booklet are available here.
In addition, the following jointly developed
publications are available on the IRS and DOL Web sites
and can be ordered through the toll-free numbers listed
below:
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Choosing a Retirement Solution for Your Small
Business, Publication 3998, provides an overview of
retirement plans available to small businesses.
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Retirement Plan Correction
Programs,
Publication 4224, provides a brief description of the IRS,
DOL, and Pension Benefit Guaranty Corporation (PBGC)
correction programs.
-
Retirement Plan Correction Programs
CD-ROM,
Publication 4050, provides in-depth information on the
IRS, DOL, and PBGC correction programs.
-
Payroll Deduction IRAs for Small
Businesses,
Publication 4587, describes an arrangement that is an easy
way for businesses to give employees an opportunity to
save for retirement.
-
SEP Retirement Plans for Small
Businesses,
Publication 4333, describes another type of retirement
plan designed for small businesses.
-
401(k) Plans for Small
Businesses, Publication
4222, provides detailed information regarding the
establishment and operation of a 401(k) plan.
Order from:
IRS: 1.800.TAX-FORM (1.800.829.3676)
DOL: 1.866.444.EBSA (3272)
Related materials available from DOL:
DOL sponsors two interactive Web sites - the Small
Business Advisor, available at www.dol.gov/elaws/pwbaplan.htm,
and, along with the American Institute of Certified Public
Accounts (AICPA), www.choosingaretirementsolution.org.
Related materials available from the IRS:
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Publication 560, Retirement Plans for Small
Business (SEP, SIMPLE, and Qualified Plans).
-
Publication 590, Individual Retirement
Arrangements (IRAs).
-
Publication 4405, Have You Had Your Check-Up
This Year? for SIMPLE IRAs, SEPs, and Similar Retirement
Plans.
SIMPLE IRA Plans for Small
Businesses is a joint project of the U.S. Department of
Labor's Employee Benefits Security Administration (EBSA) and the
Internal Revenue
Service. This publication and other EBSA
materials are available by calling toll-free
1.866.444.EBSA (3272). It is also available from the
Internal Revenue Service at 1.800.TAX-FORM
(1.800.829.3676). This material will be made available to
sensory impaired individuals upon request:
Voice phone: 202.693.8664, Text Telephone: 202.501.3911. This booklet constitutes a small entity
compliance guide for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996. |