Simple IRA Overview
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This document provides an overview of SIMPLE IRAs. Key points include: - SIMPLE IRAs allow tax-deferred contributions for small businesses with 100 or fewer employees. They provide minimal paperwork and tax filing. - Employers must make either a dollar-for-dollar match up to 3% of pay or a 2% contribution for all eligible employees earning $5,000 or more in a year. - The maximum annual contribution limit for employees is $10,500 in deferrals and $2,500 in matching contributions. Employer contributions are immediately vested.
Simple IRA Overview
- 1. SIMPLE IRA’s Overview VanderLugt, Mulder, DeVries & Elders www.vmde.com Michael L. DeVries, CFP ® CHBC EA Contact
- 2. Eligible Employers Businesses with 100 or fewer employees, including state and local governments and tax-exempt organizations, are eligible for SIMPLE IRAs.
- 3. Advantages SIMPLE IRAs allow participant tax-deferral, flexible employer contributions and minimal paperwork and tax filing. For plan participants, SIMPLE IRAs provide creditor protection at both the federal and state levels.
- 4. Eligible Employees Any employee who earns $5,000 during any two preceding years and who is expected to earn $5,000 in the current year is eligible; certain employees can be excluded. The employer may also specify less restrictive eligibility requirements on the SIMPLE adoption agreement to expand the group of employees who are eligible.
- 5. Employer Contributions may be changed annually minimum contribution required for all eligible employees earning at least $5,000 during the year: dollar-for-dollar match up to 3% of pay — may be reduced to as low as 1% for two of every five years OR 2% of gross pay
- 6. Employer Contributions For 2007 and 2008, $26,000 is the maximum annual allocation to a participant’s account ($10,500 deferral, plus $10,500 maximum match; $2,500 catch-up contribution and $2,500 matching contribution, if applicable). Limited to 3% of compensation. All employer and participant contributions are immediately vested.
- 7. Example
- 8. Participant Deferrals For 2007 and 2008, the maximum annual participant deferral is $10,500; the maximum annual participant deferral for those age 50 or older is $13,000. The participant controls the distributions. All employer and participant contributions are immediately vested.
- 9. Enrollment Period When an employer establishes a SIMPLE plan effective date, each eligible employee becomes eligible to make deferrals on that date. The employer then decides when the enrollment period begins and ends — it can be any 60-day period that includes the effective date or the day before the effective date. Employers must provide all eligible employees written notification of their eligibility and the employer’s contribution amount before the enrollment period begins. All subsequent enrollment periods will begin on November 2 and end on December 31 for the next plan year.
- 10. Taxes and Testing Employer contributions not subject to Social Security/Medicare (FICA) or Federal Unemployment (FUTA). Participant deferrals and earnings grow tax-free until withdrawn at retirement. Deferrals are reported on W-2 forms. Deferrals are subject to FICA, FUTA and Railroad Retirement Tax (RRTA). No top-heavy, ADP, ACP or 415 testing is required. No 5500 reporting is required.
- 11. Fiduciary Responsibility Fiduciaries have limited liability since Individual Retirement Accounts (IRAs) are set up for each eligible employee, and participants control their own investment choices.
- 12. Funding Deadlines Establishment - October 1 of the current calendar year. Participant deferrals: The employer must deposit the elective deferrals into each participant’s SIMPLE IRA as of the earliest date on which those contributions can be reasonably segregated from the employer’s general assets, but in no case later than the close of the 30-day period following the last day of the month to which such elective deferrals relate. For example, if the deferrals are for October, the deposit must be made by November 30. Employer contributions: The employer’s tax filing deadline (including extensions).