A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees. "SIMPLE" stands for "Savings Incentive Match Plan for Employees," and "IRA" stands for "Individual Retirement Account." Employers can choose to make a mandatory 2% retirement account contribution to all employees or an optional matching contribution of up to 3%. Employees can contribute a maximum of $12,500 annually in 2018; the maximum is increased periodically to account for inflation. Retirement savers ages 50 and older may make an additional catch-up contribution of $3,000, bringing their annual maximum to $15,500.
The appeal of SIMPLE IRAs is that they have minimal paperwork requirements, just an initial plan document and annual disclosures to employees. The employer establishes the plan through a financial institution that administers it. Startup and maintenance costs are low, and employers get a tax deduction for contributions they make for employees. To be eligible to establish a SIMPLE IRA, the employer must have 100 or fewer employees. To participate in the plan, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude from participation employees who receive benefits through a union.
Employers establish the plan using Internal Revenue Service (IRS) Form 5304-SIMPLE, if they want to allow employees to choose the financial institution where they will hold their SIMPLE IRAs, or using Form 5305-SIMPLE, if the employer wants to choose the financial institution where employees will hold their IRAs. Employees must fill out a SIMPLE IRA adoption agreement to open their accounts. Once the plan is established, employers are required to contribute to it each year unless the plan is terminated. However, employers may change their contribution decision between the 2% mandatory contribution and the 3% matching contribution if they follow IRS rules. More information may be found on the IRS SIMPLE IRA information page.
One drawback of SIMPLE IRAs is that the business owner can’t save as much for retirement as with other small business retirement plans, such as a simplified employee pension (SEP) or a 401(k), which also offer higher catch-up contribution limits. Also, a SIMPLE IRA cannot be rolled over into a traditional IRA without a two-year waiting period from the time the employee first joined a plan, unlike a 401(k). Similarly, SEP IRAs and traditional lRAs may not be rolled over into a SIMPLE IRA.