Small Business Retirement Planning
Understanding SIMPLE IRAs
As a small business employer, you may not be able to afford a top-tier retirement plan for your workers. A SIMPLE IRA can be a great way to provide a retirement benefit without breaking your budget.
Employees of small businesses are a highly committed lot who are personally invested in the company's success.
But limited resources often mean that their commitment is not rewarded, at least not in the form of the perks and benefits their peers receive from larger employers.
Retirement plans are a particularly dicey issue for small business employers. American workers know that if they are going to have any chance of enjoying their golden years, they'll need to augment social security benefits with their own nest egg. However, retirement plans are also a costly business expense that is beyond the budget parameters of many small companies.
SIMPLE (Savings Incentive Match PLan for Employees) IRAs are a retirement savings device that was designed to meet the unique requirements of small businesses. In many ways, they live up to their name as a "simple" and convenient retirement benefit that leverages a savings partnership between small business owners and their employees.
SIMPLE IRA Basics
SIMPLE IRAs make it as easy as possible for small business employers to offer retirement benefits for their employees. Participation in SIMPLE IRA plans is limited to employers with less than 100 workers earning at least $5,000. Small business employers are free to either designate a financial institution to manage all of the workers' IRAs or to allow their workers to identify their own qualified financial institutions - it's up to you.
Employers must make some form of contribution in a SIMPLE IRA benefit plan. This can happen in one of two ways. The first is a dollar-for-dollar employee match of up to 3% of each worker's compensation. If an employee contributes 2% you contribute 2%; if he contributes 3%, you contribute 3%. It's possible to temporarily reduce the amount of the employer match, but you'll need to research the applicable restrictions to make sure you're in compliance.
The second way employers can fulfill their contribution requirement is to make a 2% nonelective contribution. This means that as an employer, you make a 2% SIMPLE IRA contribution regardless of whether or not the worker contributes anything to the plan. If a worker contributes nothing to the plan, you contribute 2% of his compensation. On the other hand, if the worker contributes 3% you still contribute 2% - not 3% like it would be in an employer-match scenario.
Employees can only make contributions to the plan through a salary reduction. If the end of the year rolls around and an employee wants to write a check for an additional contribution, the IRS prohibits him from doing so. For 2010 and 2011, the amount of employee contributions is limited to $11,500. If the employee is age 50 or older, he may be able to contribute an additional $2,500 catch up amount.
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