SIMPLE IRA Plan (Savings Incentive Match Plan for Employees)

A SIMPLE IRA Plan allows you and your employees to make contributions to SIMPLE IRAs. Contributions can be made via elective deferral (employee) and matching or non-elective contributions (employer). Employer contributions are tax-deductible and employee contributions are excluded from income for Federal Income Tax purposes.

Plan Eligibility

• Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations with 100 or fewer employees, may establish a SIMPLE IRA Plan. Note: If the employer exceeds the 100-employee limit during the current year, the plan can continue for 2 more years.
  
  
• All eligible employees must be allowed to participate in the SIMPLE IRA Plan. An eligible employee is any employee who:
  
  
  • Received at least $5,000 in compensation from the employer during any two years, preceding the current calendar year
    
    and
    
    
  • Is reasonably expected to receive at least $5,000 in compensation from the employer in the current calendar year.

Vesting

Vesting is the participant's ownership in the value of his/her retirement account benefit. Vesting is 100% immediate upon becoming a participant in the plan and applies to all participants.

Tax Advantages

• Employer contributions are tax deductible for the employer.
• Employee elective deferrals are excluded from the employee's income for Federal Income Tax purposes.
• Tax-deferred growth -- any investment earnings grow tax-deferred until withdrawn.

Plan Deadlines

• Generally, employees elect to make elective deferrals during the 60-day period preceding the calendar year. The plan may allow the employee to change his/her elective deferral during the year (including the right to terminate participation during the year).
• Employer contributions can be made up until the due date (plus extensions) of the employer's tax return. The employer must deposit employee deferral contributions as soon as reasonably possible but no later than 30 days after the end of the month during which the elective deferral was made.

Contribution Flexibility

The employer may elect a matching contribution formula or a non-elective formula of 2% of compensation for all eligible employees. If a matching formula is elected:

• The employer must match the employee's elective deferrals up to 3% of the employee's compensation for the year.
• An employer can choose a different alternative for each year; the 3% match can be reduced to a minimum of 1%. The employer cannot choose a percentage less than 3% for more than 2 years during a 5 year period that ends with and includes the year for which the choice is effective

  or

• The employer may elect the non-elective formula of 2% of all eligible participants' compensation. Under this formula, all eligible employees would receive this non-elective contribution whether making elective deferral contributions or not.

Investment Options

• State Farm Mutual Funds®

Key Advantages

Plan simplicity

• No complicated forms to complete.
• No annual reports for the employer to file with the IRS.

Attractive benefits for employees

• Employee contributions are made from payroll deductions on a pre-tax basis and grow tax-deferred.
• Offering a SIMPLE IRA plan can make it easier to attract and retain valuable employees.
• A SIMPLE IRA plan can assist in providing retirement income for eligible employees.

Early Withdrawal Penalty

Generally, the 10% tax penalty applicable to distributions applies for participants under the age of 59 1/2. However, for withdrawals during the two-year period beginning on the date that the employee's participation in the plan began, the tax penalty is 25%. Participants will have to pay Federal Income Tax on the distributions, as well.

Reporting and Disclosure Requirements

No IRS forms are required to be filed by the employer. Each employee should be provided with a completed copy of the IRS form 5304-SIMPLE and the instructions.

For detailed information on qualified retirement plans, please contact your State Farm agent.

State Farm VP Management Corp. Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 269 KB) .

It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

AP2007/12/9646