The SIMPLE IRA, more properly known as the Savings Incentive Match Plan for Employees, is a relatively easy way for a small business to add a retirement plan to their employee benefits.
How the plan works
Each eligible employee sets up an IRA and can choose to make deferrals before taxes from their paychecks. Employers can either make a non-elective payment of 2 percent of compensation to everyone who is eligible for the plan, or they can match the employees' contributions up to 3 percent of their compensation for the year. (All employees must receive the same percentage of compensation for either the employer non-elective or matching contribution, but the employer can change the percentage from year to year, subject to certain restrictions.)
The employer can deduct the contributions from income taxes. The participating employees don't have to pay taxes on the income that they contribute, either, although they may owe taxes when they take withdrawals. Any investment earnings the employees make will compound tax-deferred until withdrawal, too.
Who is eligible
Eligible employees must have received at least $5,000 in either of the two years before the current year, and are reasonably expected to earn at least $5,000 in the current year. An employer can set less restrictive requirements (for example, allowing all employees to participate, even those making less than $5,000), but it can't make more restrictions.
Money in the plan is 100 percent vested; an employee can withdraw a portion or all of the funds in their account at anytime since the account is an Individual Retirement Account.
This plan is for businesses with fewer than 100 employees. If your business grows and hires more than 100 people, the plan can continue for two more years, then it has to be disbanded.
The ease and flexibility of a SIMPLE IRA can help a small business give employees a valuable benefit to attract and retain talent. The minimal paperwork and ability for the owner(s) to set money aside for their own retirement makes it appealing. A SIMPLE-IRA plan may give your company the edge it needs to grow.
Neither State Farm® nor its agents provide tax or legal advice.