A SIMPLE IRA is a small business retirement plan that is limited to employers with 100 or fewer employees. This includes those who are self-employed. The acronym SIMPLE stands for Savings Incentive Match Plan for Employees.

Understanding the SIMPLE IRA

In exchange for minimal paperwork and administrative requirements, there are some requirements that employers must follow in offering a SIMPLE IRA. However, these plans require virtually no reporting or regulatory red tape that is often present in other types of business retirement plans such as a 401(k).

Employers can choose the financial institution where the employee accounts are housed, or they may be able to allow the employees to open their accounts at the financial institution of their choice.

There are two required disclosure documents from the employer that must be given to the employees. The summary description of the plan provides a number of details about the plan. The annual election notice describes their right to make salary deferral contributions and the employer’s decision to make matching or nonelective contributions. Employees must be given the ability to change their elections for contributions at least annually.

There are two potential drawbacks to a SIMPLE IRA. One is that the employee contribution limits are lower than other plans such as a 401(k) plan. This limits contributions for all employees, including the business owner. The other potential drawback is a quirky rule that prohibits money in a SIMPLE IRA from being rolled over to any other type of retirement other than another SIMPLE IRA if an employee leaves the company within two years of first participating in the SIMPLE IRA.

Employee Participation and Contribution Limits

Employees are eligible to participate in the plan if they received at least $5,000 in compensation from the employer in any two prior years and have the expectation of earning at least that much in the current year. Employers may exclude employees who receive compensation from their union if they wish.

For 2023, employees can contribute up to $15,500. The limit increases to $19,000 for those who are 50 or older.

Employer Matching and Contribution Options

One aspect of the SIMPLE IRA is that employers must make contributions to the employee accounts. Employers have two choices for these matching contributions.

• The first is a dollar-for-dollar match of each employee’s contributions up to 3% of their compensation. This can be reduced to a little as 1% in any two years within a five-year period.
• Alternatively, they can make a 2% nonelective contribution to all employees, whether or not they choose to contribute to the plan on their own.

Beginning in 2024, the Secure 2.0 legislation allows employers to make additional matching contributions of up to the lesser of either 10% of compensation or $5,000. The additional contributions must be made in a uniform fashion to all employees.

Secure 2.0 now also allows employers to offer a Roth SIMPLE IRA which was not an option prior to this.

Annual Reporting and Compliance

One of the benefits of a SIMPLE IRA for employers is that there is no mandated government reporting related to the plan. This differs from other types of plans such as a 401(k) or a defined benefit pension plan.

The custodian where the employee’s respective plan accounts are held is responsible for issuing a Form 1099-R covering any distributions taken by the employee participants. The financial institution holding the accounts is responsible for providing Form 5498, Individual Retirement Arrangement Contribution Information, to both the IRS and to the participants.

SIMPLE IRA contributions are not reported as wages on an employee’s W-2, but the amount of the contributions, but they must be included in the section of Social Security and Medicare wages. This is something that that employer should track during the year on their own or through any sort of outside payroll service that might be used.

Retirement Plan Reviews and Updates

As with any retirement plan, employers will want to review if the SIMPLE IRA is performing as they had hoped. If the plan is set up with a menu of employer offered investments, these should be reviewed periodically. If the employees are left to open their own accounts this would, of course, not be applicable.

They should also review the level of employee participation in the plan. Are employees participating and are they contributing significant amounts to their retirement? If these figures are lower than you may have hoped for, education and information provided to your employees about the benefit of saving for retirement through this type of plan may help.

Seeking Professional Guidance

When looking to establish a SIMPLE IRA or any type of retirement plan for your business, it pays to seek professional guidance. Your Wedbush financial advisor can help you establish a SIMPLE IRA or other type of retirement plan. They can also help you to evaluate an existing plan to see if it is doing what you hope for your employees.

Disclosure

Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.