Many small business owners are looking for a retirement plan that allows employees to defer a portion of their salary, without the complexity and the administrative requirements of a 401(k) plan.

A SIMPLE IRA plan, which works much like a 401(k) plan but without the administrative cost, may be the solution.

Any type of business entity, including a sole proprietorship, partnership or corporation, as well as certain tax-exempt organizations, can establish a SIMPLE IRA plan for its employees. A SIMPLE plan can also be established as a SIMPLE 401(k) trust account, but is not utilized in this format very often. For that reason, the information provided in this section is specific to the SIMPLE IRA format.

Eligibility

An employer maintaining a SIMPLE plan may not maintain any other qualified plan in which the employees currently receive benefits. An eligible employer is defined as having 100 or fewer employees. Employees must be eligible if they receive at least $5,000 in compensation during any two preceding years and are expected to earn at least $5,000 in the current year. A less restrictive eligibility requirement may be utilized. There are no minimum participation requirements.

Contributions

Employees may defer up to $8,000 (in 2003), with no set maximum percentage of compensation.* The employer must make a mandatory contribution as either a matching dollar-for-dollar contribution on the first 3% elective deferral or a 2% uniform contribution to all eligible employees, regardless of whether they made an elective deferral. (The employer can elect a lower matching contribution in two out of five consecutive years.)

*Employees age 50 and older may make a catch-up contribution of $1000 for 2003.

Advantages

A SIMPLE plan is not subject to nondiscrimination tests or top-heavy requirements. If the SIMPLE IRA format is used, there is no requirement to file a Form 5500. As a result, there are minimal plan administration costs, and highly paid or owner-employees are not restricted in their ability to defer as a result of low participation by the lower-paid employees.

Download our Qualified Plan Comparison chart (.PDF format) to compare this product to other Qualified Retirement Plan options.

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