A retirement plan option available to small employers is a SIMPLE IRA. To qualify for this, you need to have had 100 or fewer employees who received at least $5,000 in compensation during the previous calendar year. When calculating the 100-employee limit, you need to include all employees, even those who have not yet met the plan’s eligibility requirements. You also can’t use a SIMPLE IRA plan if you maintain another retirement plan for your employees, and any of them receive an allocation or accrue a benefit under the other plan during the current calendar year. There are 2 exceptions to this:
- The other plan is for employees covered by a collective bargaining agreement, and they are excluded from the SIMPLE IRA.
- Your business was part of an acquisition, disposition, or similar transaction during the current or 2 previous calendar years, and only your separate employees participate in the SIMPLE IRA.
The default eligibility criteria for employees to participate in a SIMPLE IRA is having at least $5,000 of compensation in any 2 previous calendar years, whether or not they were consecutive, and being reasonably expected to receive at least $5,000 of compensation in the current year. As the employer, you can choose to have less stringent eligibility requirements, but not more stringent.
Employees can contribute to a SIMPLE IRA through salary reductions. The annual contribution limit is $13,000 in 2019, and employees over the age of 50 can contribute up to an additional $3,000 as catch up contributions. These limits are typically updated each year based on cost-of-living adjustments.
Employers have 2 options for how they make contributions, which are:
- Non-elective contributions of 2% of employees’ salaries. With this option, you must contribute to each employee’s SIMPLE IRA account, even if the employee doesn’t contribute.
- Matching contributions of 1% to 3% of employees’ salaries. With this option, if an employee started or stopped making contributions during the year, you must still make the matching contribution based on their compensation for the entire calendar year. For example, if someone earning $50,000 per year stopped making contributions on September, 30, and you match 3% of salaries, you would contribute $1,500, which is 3% of the full $50,000.
If you decide to change which type of contribution you make, you have to make the change as of January 1 of the next year, and you must notify employees of the change at least 60 days ahead of time. The same requirement exists if you change the percentage of matching contributions. You can’t match less than 3% for more than 2 years during a 5-year window.
SIMPLE IRAs are generally exempt from the non-discrimination testing and annual filing requirements that other plans have. 100% of employer contributions must vest immediately to employees.
Other types of retirement plans to consider: