Is A SIMPLE IRA Right for Your Small Business?

What is a SIMPLE IRA?

A SIMPLE IRA stands for “Savings Incentive Match Plan for Employees Individual Retirement Accounts.” That’s a mouthful!

A SIMPLE IRA, like other retirement accounts, is tax-deferred money. Employees aren’t taxed until they withdraw the money from their accounts.

Employers have the following contribution requirements:

• Matching contributions up to 3% of employee’s compensation or
• A flat contribution of 2% of employee compensation to all eligible employees, regardless of an employee’s own salary deduction contribution

(We discuss these employer contribution requirements in more detail below.)

Who are SIMPLE IRA plans for?

Only small businesses with fewer than 100 employees are eligible to set up SIMPLE IRA plans. If you choose to offer a SIMPLE IRA plan, you cannot offer any other type of retirement plan. (There are very limited exceptions to this “one-plan requirement,” which the IRS lays out here.)

To participate, employees must:

• Have earned at least $5,000 in compensation during any 2 years prior to the current calendar year and
• Expect to earn at least $5,000 in compensation during the current calendar year

However, the IRS does allow small businesses to loosen these requirements. For example, you can lower the eligibility requirements to $3,000 compensation per year. But you cannot make the requirements more restrictive, like raising the compensation baseline from $5,000 to $7,000 per year.

Employees are always fully vested in these plans, with complete ownership of the money within the account.

What are the employer contribution requirements for SIMPLE IRA plans?

Employers are required to contribute to their employees’ SIMPLE IRA plans each year. Employees cannot opt out of the plans; however, they are not required to contribute.

Employers have two options for contributions:

• Matching contributions: For employees who elect to contribute to their IRA accounts, you offer a matching contribution up to 3% of their compensation. This matching contribution does not adhere to an annual compensation limit. You may lower the matching contribution to no lower than 1%, but only for no longer than two out of five years.
• Nonelective contributions: Rather than matching contributions, you can choose to offer all eligible employees a contribution equal to 2% of their compensation, up to the 2024 annual limit of $345,000. With this option, you make these contributions regardless of whether or not the employee is contributing to their SIMPLE IRA plan.

Employees cannot contribute more than $16,000 to their plan in 2024. However, for participants who are age 50 or older, they can make additional “catch-up” contributions, totaling an extra $3,500 in 2024.

To make any plan changes, the IRS notes you must notify employees “within a reasonable period before the 60-day election period for the calendar year.”

Do SIMPLE IRA plans offer tax benefits for employers?

Yes! Your business may be eligible for a tax credit of up to $500 per year for the first three years the plan is in place, per I.R.S. Form 8881.5

How do you set a SIMPLE IRA plan up for your employees?

With no annual filing requirements and significantly lower start-up and operational costs than traditional 401(k) plans, a SIMPLE IRA is a great option for small businesses wishing to contribute to their employees’ retirement.

Many financial institutions, like banks, savings and loan associations, and insurance companies have options for setting up a SIMPLE IRA for your small business.

Looking for guidance on setting up a SIMPLE IRA plan? We can help. Contact our Landmark financial advisors for assistance in plan setup.

When is the deadline to set up a SIMPLE IRA?

But time is ticking…

The deadline to establish a SIMPLE IRA plan for your business is October 1 of the tax year. After this deadline has passed, you cannot establish a new SIMPLE IRA until January 1 of the next tax year. (The exception to this deadline is if your business is established after October 1.)