The Savings Incentive Match Plan for Employees (SIMPLE) IRA is an alternative to offering your employees a 401k account, and the comparison of a SIMPLE IRA vs 401K is imperative for businesses. Traditional 401k accounts can be very costly to administer as a small business. The cost of administration decreases if you have more employees, which makes 401k's best suited for large organizations. Small companies will thrive with low paperwork, low administration retirement plans. The SIMPLE plan is designed with this in mind.
SIMPLE IRA Rules
To be eligible to have a SIMPLE IRA, you must employ 100 or fewer full-time employees. Your company cannot offer any alternative to this retirement plan. Finally, you must be able to file a few simple forms each year. The low amount of regulation required for the SIMPLE IRA makes it very manageable, and there is a transition period for companies that outgrow the 100 employee cap before penalties ensue.
SIMPLE IRA Operation
SIMPLE IRAs are very easy to administer. To offer this plan, you must first notify your employees of the option. You will then ask each employee to set up an IRA. The employee himself or herself can choose a plan administrator or IRA provider and fill out paperwork to set up an account without your assistance. Once the account is set up, the employee must notify you so you can begin making deposits into the account. A portion of each employees' paycheck can be deposited directly into the IRA, giving you the benefit of vesting or matching your employees' funds without the hassle of administering the funds.
SIMPLE IRA for Business Owners
As of 2001, you have two options on how to save for retirement as a business owner offering SIMPLE IRA plans. First, you can operate the account as an owner, depositing funds up to the annual maximum or a portion of your profit of your business in a given year, whichever was lower. Second, you can deposit funds in the account from a regular paycheck you issue yourself as an employee of your own organization. The second option is beneficial for business owners who do not receive large profit shares but do receive a competitive salary. It also provides the benefit of regular contributions to the account.
SIMPLE IRA Alternatives
Rather than offering a SIMPLE IRA, you may wish to explore the SIMPLE 401k. With this option, you will still have a relatively straightforward administrative process. You must have fewer than 101 employees, and you must not offer other retirement plans. The SIMPLE 401k's similarities with the SIMPLE IRA stop here. Rather than allowing your employees to set up their own account, you will be the one setting up the accounts on your employees' behalves. You will choose an administrator, and this administrator will handle the investment options of all of your employees. This version is slightly more complicated than the SIMPLE IRA because the accounts are held with you rather than independently. However, this option may allow you to match funds easier, and it may present more tax benefits to your employees.