Thanks to the provisions of the Small Business Jobs Protection Act of 1996, employers that
(1) have 100 or fewer employees who earned at least $5,000 in the preceding year, and
(2) do not currently maintain other retirement plans
can set up a SIMPLE (Savings Investment Match Plans for Employees of Small Employers) retirement plan on behalf of eligible employees. The plan can be either:
(1) An IRA for each eligible employee, or
(2) Part of a qualified cash or deferred arrangement such as a 401(k) plan.
Since each are afforded different treatment under the law, employers need to consider the unique requirements before selecting between the two.
In either case, for the 2007 and 2008 tax years, employees may make pretax contributions of up to $10,500 per year into the SIMPLE plan. Employers must match employees' contributions dollar-for-dollar, up to 3% of pay, or make a fixed 2% across-the board contribution to all eligible employees, whether they participate or not. (If the employer elects a matching contribution that is less than 3%, the percentage must not be less than 1%.
Contributions to a SIMPLE Plan are deductible by the employer and are excluded from the gross income of the employee. Employees can terminate participation at any time during the year.
Distributions from a SIMPLE retirement account are subject to IRA rules and are included in income when withdrawn. Tax-free rollovers can generally be made from one SIMPLE account into another retirement account,but check with a financial advisor because there may be different rules depending on how long you've been with our employer, and what kind of plan you're rolling from and rolling into. Early withdrawals generally are subject to a 10% (or 25%) penalty.
When employers start these plans, the employer can either permit employees to select the financial institution for SIMPLE IRA contributions or send contributions for all employees to one institution.
For more information about SIMPLE plans, check out the Department of Labor's informational brochure at: http://www.dol.gov/ebsa/publications/simple.html. Also check out our Income Tax section on the tax consequences of SIMPLE IRA plan distributions.
(Reviewed 9-08)