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 It's
as SIMPLE as 1-2-3
For more than 50 percent of small-business owners, employee recruitment and retention were the
major reasons for offering a retirement plan.¹
A savings incentive match plan for employees (SIMPLE) may be just the bait to
lure and catch qualified employees. SIMPLE plans are easy to understand and,
more important, easier to manage.²
Designed for sole proprietors and companies with 100 or fewer employees, SIMPLEs
are retirement plans in which employees and employers share responsibility for
contributing retirement funds.
They are commonly set up as SIMPLE individual retirement accounts (IRAs), but
also can be established as part of a 401(k) plan.
Employers can set up SIMPLE IRAs for employees who earned $5,000 or more in
salary during the preceding year. All individuals employed at any time during
the calendar year are considered, regardless of whether they are eligible to
participate in the plan.
Employees may make annual contributions of up to $9,000 in 2004 and $10,000 in
2005. Employers must match employee contributions in one of two ways. One option
is a dollar-for-dollar matching contribution of up to 3 percent of the
employee's salary. Alternatively, employers must make a 2 percent nonelective
contribution for each eligible employee in the plan.
SIMPLE plans may be the preferred retirement plan for small businesses because
they are easy and inexpensive to set up and operate. The plans do not have the
participation requirements of a 401(k) and do not require any annual compliance
testing or annual tax filings. Also, employer contributions, whether made on
behalf of the employees or the owner, are tax deductible for the business.
For employees, SIMPLE plans offer a way to contribute pre-tax dollars into a
tax-deferred retirement plan. Another benefit is that all contributions vest
immediately.
On the other hand, SIMPLE plans require employer matching, and they have lower
contribution limits than some other employer-sponsored retirement plans.
Business owners who want to attract and keep quality employees may find that
accomplishing this goal is as SIMPLE as providing a retirement plan.
1) The
2003 Small Employer Retirement Survey
2) Distributions from employer-sponsored retirement plans are taxed as ordinary
income and, if taken prior to reaching age 59½, may be subject to an additional
10 percent federal income tax penalty.
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