YOU ASK:

I have a small business with 50 employees. Can I establish a SIMPLE retirement plan?

WE ANSWER:

Yes, if you own a business and have 100 or fewer employees and you have not adopted another qualified retirement plan, the SIMPLE retirement plan might be the best pension option for you. There are certain eligibility requirements and contribution limit rules that you need to take into consideration:

  • SIMPLE is an abbreviation standing for Savings Incentive Match Plan for Employees. As such, it shouldn't be mistaken for the Simplified Employee Pension plan, referred to as SEP.
  • A SIMPLE plan can be established as either an IRA or a 401k, both of them being subject to the same contribution limits.
  • Both the employee and the employer can fund a SIMPLE retirement plan, but it is obligatory for employers to make contributions to their employees' retirement plan. Employees who are eligible to participate in a SIMPLE IRA, can elect to defer part of their wages to fund their pension program.
  • The SIMPLE IRA employee contribution limit for 2008 was $10,500, and as of 2009 it has increased to $11,500 for employees under age 50. The catch-up contribution limit for people aged 50 and over, is $2,500.
  • Employers have two funding options and they can switch between them every year:
    • Under the dollar-to-dollar matching option, employers match their worker's elective deferral contributions but not in excess of 3 percent of the worker's compensation.
    • Under the non-elective contribution option, employers must contribute 2 percent of their worker's compensation to each eligible employee's account, no matter whether they participate in the SIMPLE retirement plan, or not.
  • Employee eligibility for the Savings Incentive Match Plan for Employees is based on the income of the plan participants for one of the two preceding years. The minimum annual salary they have earned and are expected to earn for the current year, is set at $5,000.
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