Mountain Surfing

What's a SIMPLE retirement plan?

It's a type of simplified retirement plan for a small business.

Due to its streamlined features, it's not subject to the complex qualification requirements related to tax-qualified retirement plans. Thus, you carry low administrative and legal costs.

From your standpoint as an employer, you'll love this plan because it has simplified reporting requirements and you won't have to shoulder the tedious fiduciary responsibility of overseeing and taking care of the assets in your employees' SIMPLE accounts.

Eligibility

Your business is eligible to set up a SIMPLE plan if you employ 100 or fewer employees who earned at least $5,000 in compensation for the preceding year and they don't maintain another employer-sponsored retirement plan.

If you're self-employed with no employees, you're still eligible to set up a SIMPLE plan.

The Workings Of A SIMPLE Retirement Plan

The plan allows your employees to make elective contributions to an individual retirement account (IRA). Employees' contributions would be based on a percentage of their compensation and cannot exceed $6,000 per year.

As an employer, you would have to satisfy one of two contribution methods:

1. The Matching Contribution Method

You would have to match employee contributions dollar-for-dollar up to 3% of each participating employee's compensation.

A special rule allows you to elect a lower percentage matching contribution for all employees (but not less than 1% of each employee's compensation). However, you can't elect to use a lower percentage for more than 2 out of any 5 years.

2. Overall Contribution Method

You elect to make a 2% contribution on behalf of each eligible employee who earns at least $5,000 in compensation for the year.

Let's work through an example.

You've 2 eligible employees. Employee Cherie makes $30,000 per year and elects to contribute 5% of her annual salary (or $1,500) to the SIMPLE plan. Employee Mark, who's an eligible employee with an annual salary of $40,000, decides not to participate in the plan and thus doesn't contribute.

You, the employer, have 3 options regarding your contributions:

Option A

You can elect to match Cherie's contribution, up to 3% of her salary. Your contribution match would amount to $900.00 (3% of$30,000). Since Mark doesn't participate in the plan, it isn't your obligation to contribute on his behalf.

Option B

You can match Cherie's contribution at a rate less than 3% (but not less than 1%). But, you must take heed that you can't use this lesser match more than 2 out of any 5 years. As in option (A) above, it isn't your obligation to contribute on behalf of Mark.

Option C

You can make non-elective contributions of 2% for all eligible employees.

In this case, you would contribute $600 to Cherie's account (2% of her annual salary of $30,000) and you would also contribute $800 to Mark's account (2% of his annual salary of $40,000). Though Mark isn't participating in the plan, if you decide to go with the 2% non-elective contribution option, it's your obligation to cover each and every eligible employee, even if that employee isn't making any contributions.

I would say your choice will depend on how many employees you've, how many of them participate, their salaries, employee turnover, etc.

One thing nice about this plan is that each year's matching contribution is available for that year only, and you can change the matching the following year. You've flexible options from year to year.

Employees' Eligibility

Employees who received at least $5,000 in compensation from your company during any 2 prior years and who're reasonably expected to receive at least $5,000 in compensation from you during the current year would be eligible to participate in the SIMPLE plan.

Taxation

As an employer, your contributions to an employee's account are deductible. However, matching contributions are deductible in a given year only if you contribute by the due date for your business's federal income tax return. Employees' contributions are excluded from employees' income and the assets of a SIMPLE account, like those of a qualified retirement plan, grow tax-deferred.

Distributions

Distributions are taxed under the rules applicable to traditional IRAs, and you can make tax-free rollovers from one SIMPLE account to another.

You can rollover a SIMPLE account to a traditional IRA on a tax-free basis after a 2-year waiting period that starts the day you first became a participant in the plan.

If an employee is no longer participating in a SIMPLE plan (e.g., the employee has terminated employment), and 2 years have lapsed since the employee first participated in the plan, you can treat the employee's SIMPLE account as a traditional IRA.

Early Withdrawal Penalty

If an employee withdraws early from his/her SIMPLE account, he/she is subject to the 10% early withdrawal penalty charge. In addition, if he/she withdraws during the 2-year waiting period that begins on the date that he/she first became a participant in the plan, the early withdrawal penalty charge increases to 25%.

Due to her strong yearning to retire early in life, Cecelia Yap has been researching on the subject of retirement. She has found the most "viral" way to grow her retirement nest egg and you too can do what she does, here: http://www.perfect-body-toning.com/my-passion.html

AP - A Palestinian rammed a construction truck into three cars and a bus near the Jerusalem hotel where Barack Obama is supposed to stay Tuesday, injuring four people before an Israeli civilian shot and killed the attacker, police and witnesses said.