Is A SIMPLE IRA Plan The Right Fit?

If you own a business and have employees, you probably have little time in your day or your budget to manage and fund a retirement plan. But studies have shown that having access to a retirement plan at work is critical for employees to financially prepare for retirement. Establishing a SIMPLE IRA plan can be a smart way for you to give your employees the opportunity to save for retirement without having to spend loads of time or money to administer the plan. The SIMPLE IRA plan is like a 401(k) plan but was designed specifically to meet the needs of small businesses. Some of its perks include:

  • Giving employees a payroll deduction savings plan at work to make saving easy and automatic
  • Allowing employees and the business to reduce taxable income with pre-tax contributions
  • Allowing employers to choose employee eligibility requirements
  • Low cost for employers and employees
  • Easy to establish
  • Providing the business with the option to claim plan start-up tax credits
  • Few administrative requirements
  • Utilizes individual IRAs instead of a plan trust

Opening a SIMPLE IRA with STRATA Trust to receive your plan contributions also gives you the freedom and control to invest your retirement savings in traditional or alternative investments, just as you could with a self-directed IRA.


SIMPLE IRA Plan Eligibility

To be eligible to have a SIMPLE IRA plan, the business cannot have more than 100 employees who earned more than $5,000 in the preceding year. The business also cannot sponsor another retirement plan during the same calendar year. If your business meets these eligibility requirements, you can establish a SIMPLE IRA plan in minutes just by completing a short plan adoption agreement.


Establishing a SIMPLE IRA Plan

During the process of establishing your plan, one of few selections you will have to make is to choose when employees will be eligible to participate. You may require them to have earned at least $5,000 in compensation during any 2 preceding calendar years and be expected to earn at least $5,000 during the current year. Or you can impose less restrictive requirements. You can also exclude union employees and nonresident aliens from the plan.

The deadline for establishing a SIMPLE IRA plan is generally October 1, so that workers have at least three months in the calendar year to save in the plan.


Notifying Employees

When you establish a SIMPLE IRA plan, you need to inform your employees about the plan by providing them with a copy of the Summary Description, a notification about the type of contribution you will be making, and a Salary Reduction Agreement so they can elect whether to save some of their pay into a SIMPLE IRA. See STRATA Trust’s SIMPLE IRA Plan and Adoption Instructions, which includes these employee notices.

An eligible employee who wants to participate in the plan must complete a Salary Reduction Agreement specifying the portion of compensation they wish to contribute to the plan, and they must open a SIMPLE IRA to receive plan contributions.


Making Contributions To a SIMPLE IRA Plan

In exchange for simpler administration requirements than a 401(k) plan, SIMPLE IRA plans have lower contribution limits and require the employer to contribute to the plan each year.

Employee – For 2022, an eligible employee may defer up to $14,000 of their salary into their SIMPLE IRA. If they are age 50 or older, they may defer an additional $3,000.

Employer – The employer may choose which type of contribution to make each year:

  • A matching contribution on an employee’s deferrals, up to a maximum of 3% of compensation (the match may be as low as 1% of compensation, but for no more than 2 years out of a 5-year period) OR
  • A nonelective contribution equal to 2% of compensation for each eligible employee regardless of whether they are deferring salary into the plan


 SIMPLE IRA Plan Maintenance

Once the plan has been established, your responsibilities as an employer include:

  • Withholding employees’ salary deferrals from each paycheck
  • Depositing salary deferrals to employees’ SIMPLE IRAs as soon as you can segregate the dollars from the business’s general assets (generally within 7 business days)
  • Depositing the employer contribution by your business’s tax-filing deadline for the year, including extensions
  • Providing deferral election notices to employees at least 60 days prior to the beginning of each plan year (i.e., by November 1)

There are no nondiscrimination testing requirements, government reporting, or fiduciary responsibilities for you to worry about with this plan type.

Each employee, including yourself, is responsible for investing their SIMPLE IRA assets. They may withdraw money from the SIMPLE IRA at any time, generally following the Traditional IRA rules. However, in the case of distributions taken within the first 2 years after the first contribution is made to an employee’s SIMPLE IRA, the 10% early distribution tax on distributions taken prior to age 59½ increases to 25%.


A SIMPLE IRA plan can be a smart choice for small businesses that want to help their employees save for retirement, without taking on the hassle and expense of a more complex retirement plan.

If you’re curious about SIMPLE IRAs, or interested in opening a SIMPLE IRA account with STRATA, contact us today—our team of experts are ready to assist you.

Tags: 401k, all things retirement, IRA, ira contributions, IRA rules, retirement, SIMPLE IRA