SIMPLE IRA
From Wikicpa
A SIMPLE IRA is a type of employer provided retirement plan in the United States. Specifically, it is a type of Individual Retirement Account that is set up to be an employer provided plan. It is a qualified plan like more well known plans such as the 401(k) (profit sharing plans) and 403(b) (Tax Sheltered Annuity plans), but offers simpler and less costly administration rules. Like a 401(k) plan, the SIMPLE IRA is funded by a pre-tax salary reduction. Contribution limits for SIMPLE plans are lower than for most other types of employer provided retirement plans, $10,500 for 2007 and 2008 as compared to $15,500 for convention defined contribution plans (2007 and 2008) (Section 402(g) limit) like 401(k), 401(a) and 403(b) plans. For the non profit 501(c)(3) employer, there is no advantage in establishing a simple plan over a 403(b) plan since the 403(b) does not require any more expensive administration. In addition with the SEP IRA which is even more simple than the SIMPLE, some retirement plan consultants question choosing the SIMPLE over the SEP.
Technicalities
- The term SIMPLE IRA stands for Savings Incentive Match Plan for Employees
- Only an "Eligible Employer" may establish a SIMPLE IRA. An "eligible employer" is one with no more than 100 employees. (An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100 employee limit.)
- The plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% (subject to certain rules that allow for lower contributions -- see IRC Sec 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year regardless of the amount the employee contributes.
- A catch up provision is available for participants over the age of 50. The extra catch up contribution allowed is $2,500 for 2007 and 2008, as compared to $5,000 catch up available in a 401(k), 403(b), and 457 plans.
- The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).
- Unlike a 401(k), a SIMPLE IRA cannot be rolled over to a traditional IRA without a waiting period (2 years from the date the employee first participated in the plan).
Keeping The Plan Document Current
How Can You Tell if Your Plan Document Is Current?
If you’re using an IRS model plan, Form 5304-SIMPLE or Form 5305-SIMPLE and the date in the upper left-hand corner is either March 2002 or August 2005, you’re in good shape. Your SIMPLE IRA is in compliance. If the date is earlier than these dates, you need to obtain a current Form 5304-SIMPLE or 5305-SIMPLE and complete and sign it before December 31, 2006. A copy of the current form can be dwnload from the IRS website www.irsgov/formspubs/lndex.html, or call the IRS at (800) 829-3676.
If you’re using a prototype SIMPLE IRA plan that you obtained from a financial institution and the issue date is 2002 or later, your plan is most likely up-to-date. To be sure, you may want to contact the provider to confirm that their plan document is current.
After completing the new plan document, if necessary, the document should be kept in your files. There is not a requirement to mail the document to the IRS. Also, sometime before the end of each year, you should give eligible employees a copy of the plan document including instructions. This will satisy the annual employee notification requirment. In addition, this notification will also make the employee aware of the start of the 60-day election period which they can make changes to their deferral amounts.
