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SIMPLEs
You may decide that a SIMPLE is the preferred choice of employees for a retirement plan. Unlike SEP plans, SIMPLE plans allow employees to contribute to their own accounts. SIMPLE plans are aimed at small businesses with as many as 100 employees, including the owner.
SIMPLE plans can be either SIMPLE-IRAs or SIMPLE-401(k)s. A SIMPLE-IRA plan requires you to open an individual retirement account for each eligible employee, similar to how SEP-IRA plans are set up. (An eligible employee is defined differently for SIMPLE plans.)
You may set up a SIMPLE-IRA plan if you had 100 or fewer eligible employees in the preceding year. Once you have a SIMPLE-IRA in place, the IRS requires you to meet the 100-employee limit each year. If you exceed the limit, you may be entitled to a grace period to help you meet the requirement. See IRS Pub. 560 for more information.
If you establish a SIMPLE-IRA plan for the first time, you can make it effective for any date between January 1 and October 1. If you previously used a SIMPLE-IRA plan, the IRS requires that you make it effective from January 1. To set up a SIMPLE-IRA, complete either Form 5305-SIMPLE or Form 5304-SIMPLE.
SIMPLE-IRAs cannot be designated as Roth IRAs and contributions to a SIMPLE-IRA do not count toward the annual contribution limits of Roth IRAs.
For 2007, the contribution limit to a SIMPLE-IRA is $10,500. For those who will be age 50 or older during 2007, the contribution limit is $13,000. Employee contributions to a salary-reduction plan, which include SIMPLE-IRAs, are called elective deferrals. Contribution limits are indexed to inflation beginning in 2006.
If an employee participates in another defined-contribution, the amount of contributions to a SIMPLE-IRA is added to elective deferrals made to the other plan. For example, if an employee contributes $5,000 to a SIMPLE-IRA and $4,000 to another plan, elective deferrals total $9,000. For 2007, the authorized amount of elective deferrals to all defined-contribution plans is $15,500 or $20,500 for those 50 years of age or older during 2007.
As an employer, you may elect to make matching contributions to employees' (or yours) SIMPLE-IRAs of as much as 3% of employee compensation. Instead of making matching contributions, you may decide to make non-elective contributions. Non-elective contributions are equal to 2% of an employee's compensation and are made whether or not the employee contributes to his SIMPLE-IRA.
You can take a tax deduction for most of your contributions. Deductions may be restricted in some cases. For more information, see IRS Pub. 560. The limit on employee compensation for purposes of calculating contributions for 2007 is $225,000.
SIMPLE-IRAs allow employees to contribute to their own accounts, as well as allow you to contribute to yours. In addition to the advantage of the tax deduction you receive on the amount of contributions, employees vest immediately with SIMPLE-IRAs. You need to weigh these advantages with the disadvantage of being able to contribute less to retirement accounts than is allowed with SEP-IRAs.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Next Topic: Qualified (Keogh) plans
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