Does Your
Business Need a Retirement Plan for Employees?
A SIMPLE IRA plan
may be an option for you
There are numerous retirement plans
available for the small business owner. Some are more complicated to
manage than others. If you want to start a retirement plan for your
employees, a Savings Incentive Match Plan for Employees (SIMPLE) may be
the answer.
As the name implies, a SIMPLE is relatively simple to set up and
administer. A SIMPLE retirement plan is available to small businesses that
employ no more than 100 employees. It makes no difference whether you are
self-employed or whether your business is incorporated.
A SIMPLE plan allows your employees to make elective contributions to an
individual retirement account (IRA). Employee contributions must be based
on a percentage of their compensation and cannot exceed $10,000 for 2006.
Employees age 50 or older can elect to defer an additional $2,500, not to
exceed their compensation.
As an employer, you must satisfy one of two contribution formulas:
Under the matching contribution formula, your company generally would be
required to match employee contributions dollar-for-dollar up to three
percent of each participating employee’s compensation. If an employee
chooses not to participate and does not make elective deferrals, you are
not required to make a contribution on their behalf.
Instead of making matching contributions, you can elect to make a
two-percent contribution for each eligible employee who earns at least
$5,000 in compensation during the year. Under this option, you must cover
all eligible employees regardless if they are making elective deferrals.
A SIMPLE is appealing in the sense that the plan is somewhat flexible. The
employee’s elective deferrals are not limited to a percentage of their
compensation, but to a dollar amount. In other words, if the employee only
earns $10,000, they can defer 100 percent of their compensation. From the
employer’s standpoint, SIMPLEs are appealing because they are not subject
to the somewhat complex qualification rules. One word of caution, however:
a SIMPLE must be established by October 1 of the year you wish to begin
contributions.
