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Small business owners who want to reward and retain employees by offering retirement benefits may want to explore a savings incentive match plan for employees, or SIMPLE IRA. This program is designed for businesses with 100 employees or fewer and has administrative requirements that are, appropriately, simple. Your business can offer employees dollar-for-dollar matching or automatic contributions and, as a business owner, you can use a SIMPLE IRA to contribute to your own retirement as well.
According to 2021 data from the Bureau of Labor Statistics, 68% of private industry workers have access to retirement benefits. Yet, only 36% of nonretired workers believe they've saved enough money for their retirement, according to a Federal Reserve survey. A SIMPLE IRA lets business owners contribute to their employees' retirement, even if their company is small.
How a SIMPLE IRA Works
To set up a SIMPLE IRA, your business generally must have 100 or fewer employees and cannot maintain any other employer-sponsored retirement plans. Employers can choose to contribute in one of two ways:
- Match employee contributions dollar-for-dollar up to 3% of annual compensation. Every eligible employee who elects to contribute part of their earnings receives a 100% match, up to 3% of their wages. For example, if an employee earning $70,000 decides to put 5% ($3,500) of their salary into their SIMPLE IRA, you (the employer) would contribute an additional 3% ($2,100) as an employer match. Employees who choose not to participate don't receive any contribution.
- Make a 2% nonelective contribution for every employee earning $5,000 or more. Alternatively, you may contribute an automatic 2% of earnings toward your eligible employees' retirement, whether or not the employee chooses to contribute. In this scenario, an employee earning $70,000 per year would receive a $1,400 SIMPLE IRA contribution from you, even if they decided to contribute nothing.
The same contribution policy applies throughout your company. This means you can't choose to match your own retirement contributions 100% but decline to match your employees' contributions at the same level. You also can't favor some employees with generous contributions and not provide the same benefit to others. All employees making at least $5,000 per year are eligible to participate.
Employees are always 100% vested in their SIMPLE IRA funds, meaning they have complete ownership of their money as soon as they receive it: There's no waiting period. Employees can withdraw their funds at any time, though they'll pay income taxes on their withdrawals plus an additional 10% tax if they are under the age of 59½. If they make withdrawals within the first two years of participation, the 10% additional tax is increased to 25%.
SIMPLE IRA Contribution Limits
Although SIMPLE IRA plans are designed to be workable for small businesses with limited human resources staff, there are still rules and guidelines to follow. Check with the IRS and your plan provider for full details.
Generally speaking, contribution limits for SIMPLE IRA plans are as follows:
- In 2021, employees may contribute up to $13,500 of their earnings to a qualified SIMPLE IRA.
- In 2022, the contribution limit increases to $14,000.
- Employees 50 and older can make a $3,000 annual catch-up contribution.
- Employees who make elective contributions to 401(k), 403(b) or SIMPLE IRA plans with other employers must limit their total salary reduction contributions to $19,500 in 2021, $20,500 in 2022.
Pros and Cons of a SIMPLE IRA
SIMPLE IRAs occupy a sweet spot between individual retirement accounts (IRAs) and full-blown retirement programs for many small businesses. Like a traditional IRA, a SIMPLE IRA offers you and your employees the opportunity to set aside pretax money for retirement—and to have that money grow tax-deferred. But unlike a traditional IRA, a SIMPLE IRA plan lets you, the employer, contribute to your employees' retirement savings. It also sets higher contribution limits than traditional IRAs allow, which is typically $6,000 if you're under the age of 50.
SIMPLE IRAs are generally easier to set up and operate than 401(k) or 403(b) plans. The tradeoff: A 401(k) or 403(b) may have more flexibility to help you meet a range of employee needs. Are you a solo entrepreneur? A SEP-IRA may offer higher contribution limits—up to $58,000 in 2021 and $61,000 in 2022—though with fewer accommodations for multiple employees.
|SIMPLE IRA Pros and Cons|
|Simple to set up and run||Still requires administration and compliance|
|Allows small companies to offer retirement benefits||Little flexibility: Mandatory matching up to 3% or nonelective 2% contribution are the only options|
|Higher contribution limits than an individual IRA||Lower contribution limits than a SEP-IRA or 401(k)|
|No discrimination testing required||Assets may not be used as collateral on loans|
|All contributions are tax-deductible for the employer||Requires employer contributions, either as matching funds or nonelective contributions|
Retirement Benefits Made SIMPLE
Implementing a retirement plan for you and your employees can be a solid strategic move. It helps you compete with other employers for the best talent. It can improve your employees' financial well-being—as well as your own. And it may be more feasible than you think. Consider all of your retirement savings options before choosing the best plan for you, and get advice from your accountant, human resources advisor or plan provider for a full range of perspectives.