Financial Services - SIMPLE IRA

Savings Incentive Match Plan for Employees (SIMPLE-IRA)

SIMPLE IRAs: Big Plan Features with Small Business Appeal

Small business owners seeking a retirement plan similar to a 401(k) plan often find the Savings Incentive Match Plan for Employees (SIMPLE) IRA an ideal choice.

Employee Eligibility
Employees who received at least $5,000 of compensation in any two prior calendar years and who are expected to earn $5,000 or more in the current calendar year are eligible to contribute to a SIMPLE IRA. Employees are 100% vested in the plan immediately and can choose to terminate their participation in the plan at any time.

"SIMPLE" Administration
Setting up and administering your SIMPLE IRA is relatively easy. Unlike 401(k) plans, there are no required IRS filings or costly top-heavy or discrimination tests (tests designed to limit contributions made on behalf of higher paid employees).

Establishing the Plan
Meet with your H&R Block financial advisor to determine the type of contribution you want to make and to select investment options. Then contact your payroll vendor to arrange salary deductions from employee paychecks. Once your SIMPLE IRA has been established, the employer and employee contributions are deposited into an IRA set up in each participant's name.

Contribution Options
With a SIMPLE IRA, you can choose to make either annual matching contributions or non-elective contributions. No matter which option you choose, your annual contributions to a SIMPLE IRA are tax deductible as a business expense.

Match: Matching contributions are made only for eligible employees who choose to participate. Generally, you must match employee contributions dollar-for-dollar up to 3% of each participant's compensation. You may reduce your matching percentage to as little as 1% in any two years during a five-year period, including the first two years that the plan is established.

2% Non-elective Contributions: You contribute 2% of the first $220,000 (for 2006) of every eligible employee's compensation, regardless of employee participation.

Employee Contributions: Your eligible employees can elect to contribute up to $10,000 ($12,500 if age 50 or older) in 2006 to their SIMPLE IRA on a pre-tax basis through convenient payroll deductions.Unlike the SEP IRA or traditional IRA, the maximum employee deferral is not limited to a percentage of compensation.
The examples below show how a SIMPLE IRA account may be funded with an employer's 3% matching contribution or with a 2% non-elective contribution.

3% matching contribution. The matching contribution is made only for those employees who choose to participate in the plan. The matching percentage may be reduced to as low as 1% in any two out of five years.

2% non-elective contribution. The non-elective contribution is made for all eligible employees, even those who choose not to participate. It is based on compensation, not the amount of any employee deferral, and is subject to a $210,000 (for 2005) compensation cap.