Employer 'Retirement Plan' Using IRA's

[Guest ILM]

I own a small business employing 5 seasonal full-time employees and 4-6 seasonal part-time employees. For the full-time employees, they generally come back year after year.

The 3 most-senior employees have asked for a 401k. At a previous business, I was the 401k administrator (as well as one of the owners) and I personally would prefer not to institute a 401k now because of the testing requirements (= time spent, not the results of the test, as I probably wouldn't contribute) and cost to set it up, perform the testing and file the annual reports, etc.

My primary question to all of you is this: Could I essentially set up a 'plan' wherein I agree to match any contributions that they make to a personal IRA with a bonus, paid to the employee, which is then sent in along with their check to their IRA custodian? I would include the 'match' amount in their W2's and they would take the full deduction on their tax return. They would of course be subject to annual contribution limits which would include my matching funds. I understand that the money would be instantly theirs and would not have any 'vesting'. They are not sophisticated employees and would not question how this works. I just don't want to run afoul of any laws....

[ETA Consulting LLC]

You should set up a SIMPLE IRA. For the initial two years, you can elect the $1 for $1 match up to 1% of compensation. This will give the deferral and match features of a 401(k) while not having to deal with all the annual reporting and plan recordkeeping. After two years (or even immediately), you may choose to either provide a 2% nonelective or a 3% matching. This appears to be an appropriate retirement strategy for your situation.

Good Luck!