How does a SIMPLE Retirement Plan Work?

The SIMPLE retirement plan is a system of setting up individual retirement accounts (IRAs) for all employees in a small organization. Often, the cost of operating a 401(k) plan is too high for a small business. The business needs to remain competitive with large companies offering retirement plans. As a result, the SIMPLE IRA plan can be used in place of a 401(k).

Qualifying for the SIMPLE Plan

The SIMPLE IRA option is open to any employer with fewer than 100 employees earning $5,000 or more in a calendar year. This describes the vast majority of "small" businesses in America. The SIMPLE plan may be used by exempt organizations in addition to for-profit corporations. It is a common way for small, nonprofit companies to provide retirement plans for employees.

Setting Up IRAs

The employer only needs to set up an IRA for each employee in order to begin the process. Form 5305-SIMPLE or Form 5304-SIMPLE can be used for the purpose of setting up the IRA. These options can be set up with banks, insurance companies or finance companies. Each eligible employee must receive the benefit and information about the benefit by law.

Making Contributions

Contributions may be withheld from employee paychecks if an employee opts for this direction. If an employee elects this option, the employer must post the funds to the account within a narrow time frame, typically within 15 days. An employer is not required to match the employee's contribution. However, if an employer chooses to match the contributions, the employer must follow the standard matching rules. This means the funds must be posted to the IRA within the maximum allotted time period, typically within the taxable year. Some employers file the matches with each paycheck. Others wait until the end of the year to deposit all matches. Failing to deposit the match in time is a violation of an employment contract.

Benefits to Employees

Employees benefit from this option because they have access to primary benefits without working for a large corporation. Instead of having to set up their own IRAs, employees can count on the employer to set up the account and handle deposits. This is considered a huge assistance to most employees, and it can be a major factor in an employee's total compensation.

Benefits to the Employer

A small employer may have a hard time keeping up with the compensation offered by a large corporation. In particular, benefits are hard to offer to small groups of people. With a health care plan, for instance, the cost of adding each additional employee is incrementally lower than the cost of adding the previous. For a large organization, the cost of adding the five hundred third employee to a plan is rather low; to a small company, the cost of adding the fifty-third employee to a plan is comparatively high. Since the employers are going after the same talent, the small business needs to be able to offer similar benefits. The SIMPLE IRA plan gives an employer a way to compete with large 401(k) plans.

blog comments powered by Disqus