Business and Personal Finance: SIMPLE Plans

Retirement Plans – SIMPLE Plans

The name says it all (or at least the acronym does): The Savings Incentive Match Plan for Employees, a.k.a. SIMPLE, is usually easier to manage and easier on the bank account than are many other types of retirement plans.

Their drawback is that contributions are limited, and you may not be able to put away as much money each year as you could with other plans.

ESSENTIAL

If you decide on a SIMPLE plan, you have to offer it to all your eligible employees, but even if none of them bites, you still can set it up and be the only participant. This loophole doesn’t exist for other plan types. As long as you give your employees the option of participating, you can start saving for your own retirement with this vehicle, even if no one else does.

The simplicity comes with some strings attached. You can’t have more than 100 employees, you can’t offer any other retirement plans, and you have to offer this benefit to all eligible employees (more on that in a moment).

Plus, you have to make specific contributions into employees’ accounts every year, no matter what. Don’t let those strings tie you down, though. SIMPLE plans can be great savings vehicles for small-business employers who want to offer a retirement plan benefit but can’t afford the more expensive bells and whistles. Also, while your contributions are limited, the limits aren’t ridiculously low; you, as the business owner, can contribute up to $10,000 for 2006, and if you’re 50 or older, that max gets bumped up to $12,500 (also for 2006). Those caps go for employees, too. Finally, you have the choice of setting up your plan like either an IRA or a 401(k).

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How the Company’s Contributions Work

When you offer a SIMPLE plan to your employees, you are locked in to making contributions on their behalf (in addition to those they make for themselves) every year. To do that, you basically have two choices. You can make matching contributions for participating employees, up to 3 percent of their pay, or you can contribute a flat 2 percent for all eligible employees who make at least $5,000 a year, even if they don’t participate. Whether or not your company has profits in a given year, you have to make these contributions.

The mechanics of contributions are pretty simple. For participating employees, you withhold their contributions from their paychecks and hold them in trust until you make a deposit into the retirement fund. On the company side, that contribution counts as a fully deductible expense as soon as you write the check. As for that math, you multiply the applicable percentage by the total employees’ salaries to get the lump sum for the check, but you have make sure to allocate the right amount to each employee’s account. Once contributions are made, whether by them or by you, that amount is considered 100 percent vested right away (i.e., it belongs completely to the employee, even if he quits the next day).

Eligible Employees

While you are required to offer the SIMPLE plan to all your eligible employees, you may have some who don’t fit the description. The rules are slightly different, depending on whether you use the IRA or 401(k) base for the investments.

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To count as eligible under the IRA form, an employee has to have earned at least $5,000 over the past two years and be expected to earn as much this calendar year. With the 401(k) structure, employees have to have earned at least $5,000 last year and be expected to earn at least that much this year.