Great Business Ideas: Set Up a SIMPLE Retirement Plan

Great Ideas for your Small Business:

Set Up a SIMPLE Retirement Plan

Until recently, a business as small as Grassland Media in Madison, Wisconsin, had few pension plan options for its owners and three employees. The nearly twenty-year-old company, founded by Stu Stroup, makes industrial videos for a variety of clients. “We had been interested in establishing some kind of retirement benefits,” said Stroup. “But a 401(k) plan seemed intimidating with all the paperwork.”

Paperwork and complex tax filings discourage many smaller companies from offering any sort of retirement benefits for workers. However, with a push from former Senator Bob Dole, Congress did entrepreneurs a favor in 1996 when it established the Savings Incentive Match Plan for Employees of Small Employers, better known as SIMPLE.

“There was a gap for companies with five to fifty employees, so that’s where SIMPLE meets a need,” said Jeanette LeBlanc, marketing manager for T. Rowe Price in Baltimore. “The plan allows employers to share the cost of funding, and it’s really easy. There are no IRS filings to be made, no testing for discrimination, and minimal paperwork.”

In fact, T. Rowe Price and other major financial firms make it very easy to set up a SIMPLE plan. They’ll happily send you a kit that includes forms for the employer and employees to fill out and return. The employer fills out a 5305 form for the IRS that allows the brokerage to establish the plan and give it a number.

The employee completes some paperwork establishing an Individual Retirement Account (IRA) and makes a deposit. “The employees select all the funds their money goes into,” said LeBlanc. “Employers like it because it’s very hands-off.” Employees can contribute up to $6,000 a year on a tax-deferred basis. Employers match their contribution with 1 percent to 3 percent of annual compensation.

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Saving a few thousand dollars a year may not sound too impressive, but consider this scenario offered by LeBlanc: Your employee earns a salary of $50,000 a year and con- tributes $6,000 a year to his or her own retirement account; you kick in $1,500 a year. At the end of twenty years, the employee would have just under $400,000 if the investments selected generated a fair 9 percent rate of return.

Meanwhile, Stu Stroup’s employees are happy about having the SIMPLE plan in place. “We’re matching the first 3 percent of the employee’s contribution, dollar for dollar,” said Stroup. “Getting started was pretty straightforward. It didn’t take more than three or four hours to do. Much of that time was spent just talking with our employees about the plan. Basically, we just had to fill out a few forms, and we were done.”