If you own a business with no more than 100 employees who earned $5,000 or more last year, you are eligible to establish a special type of retirement plan for your employees – a SIMPLE IRA plan. SIMPLE IRA plans were designed specifically to help small businesses offer a 401(k)-type salary deferral plan for their employees, without the fiduciary and administrative burdens associated with a 401(k) plan. A SIMPLE IRA plan is also much less expensive to establish and operate. And now, employers have an increased tax credit available to offset any start-up costs.
SECURE Act Increases Tax Credits for Small Business Plans
Passed into law at the end of 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) changed the tax rules to expand retirement savings opportunities. Many of those changes, like the increased tax credits, are intended to encourage more employers to establish retirement plans so more workers have access to save for retirement through convenient payroll deductions.
The plan start-up tax credit now available to a small employer establishing a SEP plan, SIMPLE IRA plan, or 401(k) plan could be as high as $5,000 per year for up to three years. The credit each year is calculated as 50% of plan start-up costs up to the lesser of
• $5,000 or
• $250 multiplied by the number of employees eligible to participate in the plan who are not highly compensated.
To be eligible for this general business tax credit, the plan must include at least one rank-and-file employee, and the employer cannot have maintained a qualified retirement plan (e.g., a 401(k) plan) during the three years preceding the first credit year.
The plan start-up credit may be claimed for expenses incurred not only for establishing and administering the plan but also for providing education about the plan to employees.
An additional tax credit is available to employers who add an automatic enrollment feature to their retirement plan. An automatic enrollment feature enrolls employees into the plan at a default deferral rate if they don’t take the steps necessary to start saving in the plan. While automatic enrollment is not as commonly used with SIMPLE IRA plans as it is with 401(k) plans, adding this feature increases the tax credit available by $500 per year for the first three years the automatic enrollment feature is in effect.
More About SIMPLE IRA Plans
SIMPLE IRA plans offer a convenient way for employees (and business owners) to defer a portion of their compensation into an IRA on a pre-tax basis. For 2020, employees can defer up to $13,500 into a SIMPLE IRA ($16,500 for employees age 50 or older).
Employer contributions are required for a SIMPLE IRA plan. Employers must make one of the following types of contributions each year and provide a notice to inform employees before the start of the plan year as to which type of contribution will be made:
• Matching contribution for employees who are contributing to the plan (generally dollar-for-dollar up to 3% of the employee’s compensation) or
• 2% nonelective contribution for all eligible employees.
Once contributions are deposited into the SIMPLE IRA, the employee is responsible for selecting investments for the assets. With a STRATA Trust SIMPLE IRA, you and your employees have the full investment freedom and control of a self-directed IRA.
SIMPLE IRAs generally follow the Traditional IRA distribution and taxation rules, except that the 10% early distribution tax on distributions taken prior to age 59½ increases to 25% if early distributions are taken within two years of the first contribution to the SIMPLE IRA. Required minimum distributions (RMDs) must begin from SIMPLE IRAs when the IRA owner reaches age 72, regardless of whether they are still working.
The deadline for establishing a SIMPLE IRA plan effective in 2020 is October 1.
Disclaimer: The information provided herein does not, and is not intended to, constitute personalized financial or legal advice. The contents of the article are for general informational purposes only and should not be relied or acted upon without specific professional legal or financial advice, based upon an individual’s situation.