By: Julie Welch, CPA/PFS, CFP | Savings Incentive Match Plan for Employees (SIMPLE plans) are retirement plans that can be set up by small businesses with less than 100 employees that have no other retirement plan. The SIMPLE plan can be either an IRA or a 401(k), depending on which one you (if you are self-employed) or your employer set up.
Under a SIMPLE plan, you can choose to defer up to 100% of your current salary and have it put into a retirement plan. If you are self-employed, you can choose to defer a portion of your earnings from your business. Anything you choose to defer reduces your current income, and you will pay no tax on the earnings until you withdraw the money. However, the FICA tax, also known as the Social Security tax or self-employment tax, applies to the amounts you choose to defer.
The maximum amount of salary you can defer into a SIMPLE plan is $12,000 ($14,500 if you are 50+). This amount may be adjusted annually for inflation. If you are self-employed and have employees, you must offer this plan to your employees, but you can contribute to your plan even if your employees choose not to contribute to theirs.
If you make contributions to your SIMPLE plan, you (if you are self-employed) or your employer must also make contributions. There is a choice that your employer makes. Generally, your employer must match your contributions to your SIMPLE plan up to 3% of your pay. Alternatively, your employer can choose to contribute 2% of your pay even if you choose to make no contributions, as long as your pay is at least $5,000. Only $255,000 of your compensation can be taken into account for the calculation for 2013.
Unlike most pension and profit sharing plans, you immediately vest in any contributions that either you or your employer contributes to your SIMPLE plan. Thus, if your account balance is $12,000 and you terminate your employment, you will get the full $12,000.
Distributions you take from your SIMPLE plan can be subject to a 10% penalty unless you are at least age 59 ½ or meet another exception. Any distributions you make from your SIMPLE plan during the two-year period beginning on the first day you began participating in the SIMPLE plan are subject to a 25% penalty.
If you are self-employed or you are an employer, you can use either IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE to set up a SIMPLE plan. Use Form 5304-SIMPLE if you let each participant select where they set up their account. Use Form 5305-SIMPLE if you require all participants to use one financial institution for the accounts.
Example:
You make $24,000. Your employer has a SIMPLE plan and matches your contributions up to 3% of your pay. You choose to defer $4,000 into the SIMPLE plan.
Your contribution into the SIMPLE plan $4,000
Your employer’s contribution ($24,000 x 3%) + $720
Total contributions into = $4,720 your SIMPLE plan
Additionally, you may be eligible for the “saver’s credit” if you make a contribution of up to $2,000 to your IRA, 401(k) plan, or SIMPLE plan.
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