SIMPLE IRA Plan Basics

Keeping It Short & Simple

In Part 4 of this series we covered features common to all 401(k) plans. Now let’s look at another plan type, the SIMPLE IRA.

A SIMPLE IRA plan allows employees to make contributions to a retirement plan from their pay just like a 401(k) plan, but the maximum deferral amount is lower ($15,500 vs $22,500).

Why would a business choose this plan over a 401(k) Plan? Usually because of the ease of getting this type of plan started and its typically low administrative fees. However, there are some trade-offs associated with these benefits.

Because this plan is meant to be “SIMPLE” it provides little flexibility:

  • Leased employees must be allowed to participate, as well as employees from other related businesses.
  • Employer contributions are required, with only two options to choose from:
    1. MATCH CONTRIBUTION = Employer contributes $1 for every $1 employee contributes (up to 3% of employee’s calendar year compensation)
    2. NONELECTIVE CONTRIBUTION = Employer contributes 2% of employee’s calendar year compensation (regardless if employee contributes)
  • No additional contributions can be made. This is problematic when a business owner wants to save more and is not allowed.
  • Employee deferrals can only be made on a pre-tax basis. Roth deferrals are not allowed.
  • All employer contributions are fully vested immediately. No vesting schedule can be used to reward employees for continued employment with your business.

And don’t be fooled by its name, the plan is not so SIMPLE. Although the plan is meant to be easy enough that you don’t need to hire a professional to help with the administration, in reality it is highly recommended.

The IRS has found so many problems with SIMPLE IRA Plan administraiton that they have developed a SIMPLE IRA Plan Fix-it Guide and actively audit these types of plans.

Maximum Annual Retirement Contributions

Participant Employee Deferral Employer Contribution Annual Contributions
Less than Age 50 $15,500 2% or 3% of annual compensation Not Allowed
Age 50 or Older $19,000 2% or 3% of annual compensation Not Allowed

Although this plan may work well for your business, it’s always best to have an expert help you weigh the pros and cons based on your particular situation.

Go to the Part 6 post in this series.