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What Is a SIMPLE?
There are many types of employer-sponsored retirement plans.
One that may appeal to small businesses and to self-employed individuals is
the savings incentive match plan for employees of small employers (SIMPLE)
because, as the name implies, it is easy to set up and administer, and
employers are allowed to take a tax deduction for the contributions that are
made.
SIMPLEs can be established by small businesses that have 100
or fewer employees (who were paid at least $5,000 or more in compensation
during the previous year) and do not maintain other retirement plans. They
can be structured as an IRA for each eligible individual or as part of a
qualified cash or deferred arrangement such as a 401(k) plan. Typically,
they are structured as SIMPLE IRAs.
Eligible employees (those who earned at least $5,000 in the
preceding year) can make pre-tax contributions to their plans each year.
Participants may contribute 100% of their salaries up to $10,500 in 2007.
Those who are 50 or older during the year can elect to make $2,500 catch-up
contributions. These amounts are indexed annually for inflation.
Administrators of SIMPLE IRAs are required to make either
matching contributions equal to employee contributions (up to 3% of employee
salaries) or nonelective contributions, which set a flat 2% contribution
rate for all eligible employees. Employees are immediately 100% vested in
contributions made by the employer, and they direct their own investments.
Distribution rules are similar to most IRA plans. Withdrawals
are taxed as ordinary income and are also subject to a 10% federal income
tax penalty if withdrawn prior age 59½, unless there are extenuating
circumstances as outlined by the IRS. Required minimum distributions also
must begin after the participant reaches age 70½.
An additional rule for SIMPLE plans is that there is a
two-year waiting period after the date when an employee enrolls in the plan
to transfer contributions to another IRA on a tax-deferred basis. Any
withdrawals taken during the first two years of an employee’s participation
in the plan are subject to a 25% tax penalty in addition to ordinary income
taxes. After the first two years, early withdrawals are generally subject to
the 10% early-withdrawal penalty prior to age 59½. Of course, the IRS
sometimes allows exceptions under special circumstances.
SIMPLE IRAs may be a good choice for small-business owners
because the responsibility for funding the plan is shared between the
employer and the employee. The start-up and maintenance costs also may be
lower than for other qualified plans. If you are considering whether to
establish a retirement plan for your business, you may want to make it
SIMPLE.
© 2007 Emerald Publications
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