A SIMPLE IRA, or a Savings Incentive Match Plan for Employees of Small Employers, is a retirement planning option that allows small companies to match their employees' contributions to an Individual Retirement Account, or IRA. Businesses with 100 or fewer employees can benefit from the tax advantages of a SIMPLE IRA, while giving their employees the opportunity to build a substantial savings for the years when they're no longer working.

The SIMPLE IRA has both pros and cons to small businesses. If you establish a SIMPLE IRA for your employees, you are not permitted to offer any other retirement account to your staff. In addition, employees who participate in a SIMPLE IRA are 100 percent vested immediately, which may be a drawback to employers who prefer to establish a waiting period before offering this benefit. However, a SIMPLE IRA is affordable and easy to establish and maintain, and many employers appreciate the efficiency of this low cost option.

SIMPLE IRA Rules

Although a SIMPLE IRA imposes few rules on employers, certain requirements and restrictions apply. Companies that choose a SIMPLE IRA may not establish another retirement plan at the same time. If you already have a 401k plan in place for your employees, for instance, you may not have the option to add a SIMPLE IRA. [1]

Employees may choose whether or not to contribute to a SIMPLE IRA. Employers must either make a nonelective contribution of 2 percent of compensation for eligible employees, or match a 3 percent contribution from employees who participate in the plan. If an eligible employee does not choose to contribute to his or her SIMPLE IRA, the company must still contribute 2 percent of his or her earnings. On the other hand, if an employee does contribute, the company must match up to 3 percent of his or her compensation.

With a SIMPLE IRA, employees are 100 percent vested from the beginning. While some employers may consider this an advantage, other companies are reluctant to vest their new employees right away. An employee who is 100 percent vested is the full owner of the funds in a SIMPLE IRA. For employers who use retirement benefits as an incentive to their staff to continue employment, this feature may be a disadvantage.

The Internal Revenue Service imposes limits on employees' annual contributions. For 2012, the total amount that an employee may contribute to a SIMPLE IRA is $11,500. [2] Plan participants who are age 50 or older may make "catch up" contributions totaling $2,500 in order to meet their retirement goals.

Advantages of a SIMPLE IRA

In small companies, time is always at a premium, especially when it comes to preparing business taxes. Because a SIMPLE IRA has no filing requirements for the employer and no mandatory discrimination testing, setting up a plan can be easy and very efficient. This investment strategy allows employees to participate in their own retirement planning by contributing a percentage of their earnings each month. Employer contributions to the plan are tax deductible.Sole proprietors and members of partnerships can take tax deductions for contributions to their own plans.

Participants in a SIMPLE IRA may withdraw distributions at any time, but if they choose to do so before the age of 59 1/2, they will be charged a 10 percent tax penalty. In addition, income tax must be paid on the amount withdrawn. A SIMPLE IRA is a flexible, easy to maintain retirement option for small businesses and their employees, allowing both employers and their staff to enjoy tax benefits and increased financial stability.

http://www.irs.gov/retirement/article/0,,id=108941,00.html 01/09/2012

http://www.irs.gov/retirement/participant/article/0,,id=211345,00.html 01/09/2012