As summer approaches, many businesses begin to plan next year’s employee benefit menu. A retirement plan is typically among employees’ most desired benefits, and one of the simplest, most cost-friendly ways to provide one is the Savings Incentive Match PLan for Employees IRA – better known as a SIMPLE IRA plan.
Small businesses with 100 or fewer employees that don’t offer another retirement plan generally may establish a SIMPLE IRA. This retirement plan allows employee contributions of up to $12,500 annually, indexed to inflation, and a $3,000 catch-up contribution for employees age 50 and older.
Employers may make mandatory contributions to a SIMPLE IRA in one of two ways. The first is to match each employee’s contribution dollar for dollar up to 3% of each employee’s compensation. This option allows employers to reduce matching contributions to less than 3% but at least 1% in no more than two out of five years. The second option is to make nonelective contributions of 2% of the employee’s compensation up to the annual compensation limit of $275,000 for 2018. This option requires employers to contribute for all eligible employees, whether or not they contribute to the plan.
Pros And Cons
There are a few caveats that come with a SIMPLE IRA. If you want higher contribution limits or anticipate growing your company quickly (above 100 employees), other options may prove better. Also, employees younger than age 59 1/2 who make early withdrawals during the first two years of participation in the plan may be subject to an additional tax of up to 25% of the withdrawal, with some exceptions.
However, a SIMPLE IRA is a good retirement plan for a newer company, due to startup and operating costs that are generally less than for a traditional 401(k) and ease of administration. Talk to us to learn more.