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Understanding SIMPLE IRAs

The SIMPLE IRA or the Savings Incentive Match Plan for Employees is like a 401(k) plan but involves less administrative complexity and potentially lower maintenance fees. Despite this advantage, there are several restrictions and commitments that should be considered when looking into a SIMPLE IRA plan. Here are some answers to a few common questions about SIMPLE IRAs.

WHAT IS A SIMPLE IRA?

The SIMPLE IRA plan is designed for small businesses with 100 employees or less who earned at least $5,000 in the preceding year. Employees contribute to their SIMPLE IRA plan through salary deferrals while employers make contributions through matching or non-elective contributions.

WHAT ARE THE RESTRICTIONS? 

Employers must not maintain any other employer-sponsored retirement plan while the SIMPLE plan is in effect. In addition, an employee must be eligible to participate in the current year’s plan if they received at least $5,000 in compensation during the previous 2 years and are expected to receive at least $5,000 in compensation for the current year. Finally, an employer can reduce the requirements, but cannot make them more restrictive. 

Employees will also find themselves with certain restrictions. Rollovers and transfers are a primary concern for employees enrolled in this type of plan. During the first two years of an employee’s participation in a SIMPLE IRA plan, direct transfers or rollovers can only be rolled over or transferred to another SIMPLE IRA plan tax-free. 

After this two-year period, employees are eligible to transfer to another qualified retirement plan or personal IRA without tax consequences. In addition, funds from non-SIMPLE IRA accounts cannot be rolled over or directly transferred into a SIMPLE IRA. 

Only employee salary deferral or employer matching/non-matching contributions can be deposited into a SIMPLE IRA. 

WHAT ARE THE ADMINISTRATIVE RESPONSIBILITIES?

Deadlines for this type of plan are specific. A SIMPLE IRA plan can be established between January 1 and October 1 provided the business did not sponsor a SIMPLE IRA plan in the past. If a plan was sponsored in the past, then the new plan establishment date must be effective January 1. 

Employee notices are another factor. If a new SIMPLE IRA plan has been established, the employer must give employees a 60-day election/notification period to enroll; however, in the initial year of the plan, the notification can begin up to the effective date of the plan. If it is an existing plan, notification must be given within 60-days prior to the plan year or November 2. 2% of each eligible employee’s compensation, limited at $280,000 per employee.

SIMPLE IRA CONTRIBUTION LIMITS FOR 2019

Employee Maximum Deferral Contributions
Catch-up Contributions (if age 50 or older)
Employer Matching Contribution
Employer Non-Matching Contribution
$13,000 per Individual
$3,000 ($16,000 total)
3% matching of employee's contribution or salary. Match can be reduced to minimum 1% for two years out of five-year period
2% of each eligible employee's compensation, limited at $280,000 per employee

RESOURCES FROM IRS.GOV:  SIMPLE IRA Page -- Publication 4334 – SIMPLE IRA Plans for Small Business 

WHAT ARE THE BENEFITS & IS THIS MY BEST OPTION?

There are several benefits when considering the SIMPLE IRA plan. A benefit of the SIMPLE IRA is that it does not require IRS tax filings. Secondly, employer contributions to this plan are tax deductible and growth in this plan is tax deferred.

The major consideration when choosing a SIMPLE IRA plan is that an employer is required to make contributions to this plan and if they fail to do so, they may incur penalties. Business owners should consider if they can make this commitment when establishing a SIMPLE IRA.

WHO CAN I WORK WITH TO MANAGE MY RETIREMENT PLAN?

Financial coaching and development should be an important part of your retirement plan and is a value-added benefit for you and your employees. A financial advisor can provide the investment guidance needed to help you and your employees achieve retirement goals. You and your employees deserve to know that your retirement is being taken care of and that you have a coach available to assist you in these matters. 

Is Your Business in California?

Did you know that California businesses will be required to offer their employees retirement plans? Any California employer with five or more employees is required to establish a company sponsored retirement plan or must provide their employees with the opportunity to participate in the CalSavers program starting July 1, 2019.

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MCF Capital Management, LLC is an independent, family-run, financial advisory firm that bases its investment approach on quantitative market data analysis. One of our key focuses is small and medium-sized businesses. Our firm’s dedication to business owners not only covers managing the needs of your business, but also the needs of your employees. 

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