Savings Incentive Match Plans for Employees (SIMPLE IRAs) became available in 1997 and were designed specifically for businesses with 100 employees or less. Employees are allowed to make bigger contributions to these plans than with regular IRAs as long as the company does not offer any other retirement plans. SIMPLE plans can be 401(k)s or IRAs.
This type of plan is less complex and more cost efficient in terms of administrative requirements and offer fewer restrictions than conventional profit-sharing or pension plans. This makes them an attractive alternative for small-business owners, who will not have to undergo nondiscrimination testing, file Form 5500 for the Internal Revenue Service (IRS) on an annual basis, or follow strict regulations for employee contributions.
SIMPLE IRAs are suitable for:
| “C” Corporations | Sole Proprietors | Non-Profit Organizations |
| “S” Corporations | Partnerships |
Characteristics of SIMPLE IRAs include:
- Only an “eligible employer” may establish a SIMPLE IRA. An eligible employer is one with no more than 100 employees. An employer who has already established a SIMPLE IRA may continue to be “eligible” for two years after crossing the 100 employee limit.
- Employees may not make regular IRA contributions to their SIMPLE IRA account.
- The plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% (subject to certain rules that allow for lower contributions—see IRC Sec. 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes.
- A catch-up provision is available for participants over the age of 50.
- A SIMPLE plan can technically be funded with either an IRA or a 401K plan.
- You must wait at least 2 years to rollover a SIMPLE IRA into a traditional IRA.
- Like other types of IRA Plans there are early withdrawal penalties and tax consequences.
Retirement & Education Accounts