Among the many options that a small business has for providing retirement savings benefits for its employees is the Savings Incentive Match Plan for Employees, or SIMPLE. A SIMPLE is a type of retirement plan meant for small businesses with 100 or fewer employees and self-employed workers. Eligible employees contribute a portion of their pre-tax compensation to the plan.
SIMPLE IRAs can be used by the self-employed or companies that employ up to 100 workers. Technically, a SIMPLE is an Individual Retirement Account (IRA) set-up as an employer-sponsored plan. SIMPLEs, unlike traditional 401(k)s, are not subject to ERISA compliance laws and are less costly to administer. Any employer that offers a SIMPLE IRA may not offer any other kind of retirement plan to its employees.
SIMPLEs require one of two minimum contribution requirements from the employer. The first option requires the employer to match the employee’s contributions of up to 3 percent of the employee’s compensation. Over the course of a 5-year period the employer has the right to lower its matching contribution to no less than 1 percent of the employee’s compensation. This lowered matching contribution can only occur twice over a 5-year period.
The second option is a non-elective contribution of 2 percent of each eligible employee’s compensation. With this option, the employer must make non-elective contributions on every eligible employee’s behalf, even if the employee chooses not to contribute to the plan.
If the employer opts to make a change to the SIMPLE, whether lowering the percentage in the matching contribution plan or switching to the non-elective contribution plan, they must notify their employees within a reasonable period before the 60-day election period for that calendar year.
The 2021 contribution limit for employees is $13,500. Employees that are 50 years of age or older at the end of the calendar year can also make catch-up contributions of $3,000 to their SIMPLE IRA, moving their yearly limit to $16,500.
Distributions from a SIMPLE IRA are subject to the income tax of the year in which the payment is received and may be withdrawn at any time. These payments are available in two forms—lump sum distribution or roll over to an IRA or other employer’s retirement plan.
If the recipient of the payment is younger than 59½ years old, then an additional 10 percent penalty is added to the income tax. That penalty can be raised to 25 percent if the payment is also made within 2 years of the beginning of the SIMPLE IRA. It should also be noted that participants are not allowed to take loans from their SIMPLE IRAs.
SIMPLEs are tailor-made for small business owners and the self-employed. SIMPLE IRAs are significantly cheaper to administer than traditional 401(k)s and considerably easier to add employees to the plan. Also, the employer who sponsors the plan usually does not have any filing requirements with the IRS because the financial institution that manages the investments usually covers that portion of the work.
However, that simplicity comes at a cost. SIMPLE IRAs have significantly lower contribution limits compared to competing plan types. Employees who may want to contribute more than the $13,500 maximum may be drawn to401(k)s or SEP IRAs, which allow for contributions of $19,500 and $58,000respectively for 2021. Furthermore, SIMPLE IRAs require pre-tax salary reduction contributions to the plan. Some investors may be more drawn to retirement plans that are taxed upon distribution payment, such as ROTH IRAs.
SIMPLE IRAs are one of many possible employer-provided retirement plans to consider if you are self-employed or work for a small business that wants to offer a retirement plan. While the contribution limits may be smaller than competing plan types, SIMPLE IRAs are also easier to set up and cheaper to maintain.
This article was written by Advicent Solutions, an entity unrelated to Prudential. ©2021 Advicent Solutions. All rights reserved.
White Rose Wealth Management
Peter Kelly
White Rose Wealth Management is not an affiliate of Prudential Financial. Pete Kelly sells insurance products of Prudential Financial's affiliated insurance companies in addition to products of non-affiliated insurance companies. White Rose Wealth Management and its representatives do not render tax or legal advice. Please consult with your own advisors regarding your particular situation.
Peter Kelly offers financial planning, Aaron Trinh offers investment advisory services through Pruco Securities, LLC(Pruco), under the marketing name Prudential Financial Planning Services (PFPS), pursuant to separate client agreement. offering insurance and securities products and services as a registered representative of Pruco and an agent of issuing insurance companies. 1-800-778-2255.
White Rose Wealth Management, LLC is not affiliated with The Prudential Insurance Company of America and its affiliates, including Pruco. Other products and services may be offered through a non-Pruco entity. Peter Kelly, Aaron Trinh, nor White Rose Wealth Management, LLC do not render tax or legal advice. You should consult with your own advisors regarding your particular situation.
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