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Simple Contribution Requirements


Guest houseblend
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Guest houseblend

My husband and I own a small company (6 employees). We would like to offer our employees a retirement plan. I am a bit confused by the IRS wording regarding the Simple Plan:

"You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's comensation."

Would we as a company be required to contribute to employees' under this plan?

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Yes

From the IRS web site

"The SIMPLE IRA plan contribution is dependent upon which contribution formula you have chosen in your SIMPLE IRA plan document.

If you decide to make a 2% nonelective contribution, then each eligible employee must receive a contribution equal to 2% of compensation regardless of whether the employee makes contributions.

However, if you decide to make the dollar-for-dollar match up to 3% of pay, then only the eligible employees who have elected to make contributions will receive an employer contribution, i.e., the matching contribution.

Note that you may reduce this 3% to a lower percentage, but not lower than 1%. You may not lower the 3% for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective."

See IRS Publication 560 from the IRS for details

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First, I'd like to commend you for wanting to provide a retirement benefit to your employees.

If your goal is to offer a benefit for 2004, you missed the SIMPLE plan cutoff by a few days. In general, an employer must establish a SIMPLE plan no later than October 1. If you set up a plan now, your employees won't be able to participate until next year.

There are 2 types of SIMPLE plans: SIMPLE IRA and SIMPLE 401(k). Under either type of arrangement, you'll be required to cover any employee who (1) earned at least $5,000 in any 2 preceding years and (2) is reasonably expected to earn at least $5,000 in the the current year. The 2 preceding years don't have to be recent or consecutive; for example, if you employed someone in 1980 and 1987, and if that person began working for your company again in 2004, the individual has satisfied the 2-year requirement.

As for the employer contribution, each type of SIMPLE plan gives you a choice of either a

(1) match -- 100% of an employee's deferral, up to 3%

(2) nonelective contribution -- 2% of each eligible employee's compensation.

If you choose to make matching contributions, you get a little bit more flexibility with the SIMPLE IRA than with the SIMPLE 401(k). The match option for a SIMPLE IRA lets you make a 3% match in 3 out of 5 years, with the other 2 years being as little as 1%. With a SIMPLE 401(k) plan, your company must make a 3% match every year.

How do you determine whether to make a match or a nonelective contribution? The decision rests with your company's goals and objectives. If you want to encourage each employee to defer a portion of his/her salary, and reward him/her for doing so, choose the match option. Not every employee, however, can afford to make deferrals; think of a single mother who's struggling to support her family and might not have the luxury of saving for retirement. If you want to be egalitarian and provide a benefit to everybody, pick the nonelective contribution.

Lori Friedman

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Bear in mind also that amounts you contribute to the plan, up to allowed limits, are tax deductible. So it could be a win-win for you---You receive a tax deduction and your plan could serve to attract or retain valued employees. In addition, you may be eligible to receive a non-refundable tax credit for expenses you incurred to implement the plan for a period of three years. This credit is available to small business owners who established a retirement plan for their businesses in 2002 or after.

Since it I too late to establish a SIMPLE, you could establish a SEP IRA or a qualified plan (such as a profit sharing, 401(k) plan etc). If you are looking for a plan that is easy to administer, easy to explain to your employees, one that does not require any special filing with the IRS other than reporting the amount on the business’ tax return, one that offers you the flexibility of making contributions only when you feel you can afford to (discretionary contributions), you may want to consider the SEP IRA. A SEP IRA may be established by the business’ tax filing deadline, including extensions. This means you have until April 15 (if you are on a calendar year), plus any extensions to establish and contribute to the SEP.

Note however that for new SEPs, only employer contributions are allowed- not salary deferral contributions.

If you still want to maintain a SIMPLE, then you could fund the SEP for 2004 and start the SIMPLE in 2005.

Please feel free to post any follow-up questions

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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  • 3 months later...
Guest dfmxxxxxx

Can an employer establish a SIMPLE IRA and make employer matching contributions in accordance with the following schedule:

Year 1: 100% match on first 1% of pay employee defers

Year 2: 100% match on first 1% of pay employee defers

Year 3: 100% match on first 3% of pay employee defers

Year 4: 100% match on first 3% of pay employee defers

Year 5: 100% match on first 3% of pay employee defers

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Guest dfmxxxxxx

My prior post was in regard to a newly establish SIMPLE IRA, and the required employer matching contribution. e.g., if I start a new SIMPLE IRA plan using the 3% matching contribution formula (subject to rule that states the match can be as low as 1% in 2 out of 5 years), can I make a matching contribution of just 1% in the first two years?

If so, then I presumably would have to make a matching contribution of 3% in the 3rd, 4th, and 5th year of the plan.

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Guest dfmxxxxxx

Sorry if my prior posts were not clear: my inquiry relates to the plan year, and not to specific employees year of employment.

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Q&A D-5 of Notice 98-4 states in part that "in determining whether the limit was reduced below 3 percent for a year, any year before the first year in which an employer (or a predecessor employer) maintains a SIMPLE IRA Plan will be treated as a year for which the limit was 3 percent."

...but then again, What Do I Know?

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