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What Type of Retirement Plan Should My Business Implement? – Part 5


SIMPLE IRA Plan Basics

A SIMPLE IRA plan allows employees to make contributions to a retirement plan from their pay just like a 401(k) plan, but the maximum deferral amount is lower ($16,000 vs $23,000.)  Why would a business choose this plan over a 401(k) Plan?  Usually because of the ease of getting this type of plan started and its typically low administrative fees.  However, there are some trade-offs associated with these benefits. 

Because this plan is meant to be “SIMPLE” it provides little flexibility:

* Leased employees must be allowed to participate, as well as employees from other related businesses.

* Employer contributions are required, with 2 options to choose from:

  1. MATCH CONTRIBUTION = Employer contributes $1 for every $1 employee contributes (up to 3% of employee’s calendar year compensation)
  2. NONELECTIVE CONTRIBUTION = Employer contributes 2% of employee’s calendar year compensation (regardless if employee contributes)

* Uniform discretionary contributions are allowed up to the lesser of 10% of compensation or $5,000.  This is problematic when a business owner wants to save more and is limited, or wants to provide different contribution amounts.  

* All employer contributions are fully vested immediately – no vesting schedule can be used to reward employees for continued employment with your business. 

And don’t be fooled by its name, the plan is not so “simple”.  This plan has fewer options which is meant to make compliance easier.  Oftentimes business owners don’t hire a professional to help with administration, but in reality it is highly recommended.  The IRS has found so many problems with SIMPLE IRA Plan administration that they have developed a SIMPLE IRA Plan Fix-it Guide and actively audit these types of plans.

Maximum Annual Retirement Contributions

ParticipantEmployee Deferral*Required Employer ContributionAnnual Contributions
Less than Age 50$16,0002% or 3% of annual compensationLesser of 10% of annual compensation or $5,000
Age 50 or Older$19,5002% or 3% of annual compensationLesser of 10% of annual compensation or $5,000

*Deferral limits are increased by 10% if employer has 25 or fewer employees, or elects to make an additional 1% required contribution.  

Although this plan may work well for your business, it’s always best to have an expert help you weigh the pros and cons based on your particular situation.

Go to the Part 6 post in this series.

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