The most popular retirement plan adopted by businesses is the 401(k) plan. However, there are other options for business owners. For some small businesses, the SIMPLE plan makes the most sense.
The Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE") is designed for small employers that want to offer a retirement plan for their employees.
Eligible employers are:
- Employers with less than 100 employees.
- Employers that do not offer any other qualified retirement plans.
Employees that earned a minimum of $5,000 in the past year are eligible to participate in the plan.
The most an employee can put into a SIMPLE plan in 2010 is $11,500. Taxpayers over age 50 are allowed to contribute an additional $2,500 as a "catch up" contribution. These contributions are made from payroll deductions on a pre-tax basis.
Employers must match dollar for dollar up to 3% of the employees' earnings (before their contribution). This match is made only to employees that are participating in the plan.
Alternatively, an employer can elect to make "non-elective contributions" of 2%, not to exceed a wage base of $245,000 for 2010. Therefore, the maximum employer match would be $4,900. Under this option, the employer would contribute for eligible employees whether they were participating in the plan or not.
One major benefit of a SIMPLE plan is that the cost to adopt and manage this plan is very modest. With other qualified retirement plans such as the 401(k) plan and a profit-sharing plan, the IRS requires reports to be filed. This increases the administrative costs of the plan. There are no annual reporting requirements with a SIMPLE plan, which helps keep expenses down.
ACTION ITEM: Smaller employers looking to offer a retirement plan for their employees should consider a SIMPLE plan.
Thomas F. Scanlon, CPA, CFP®