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Employee Perks
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Article 5: Low-Cost Retirement Plans
If you’ve wanted to
offer retirement benefits to your employees but
thought you couldn’t afford to sponsor a
retirement plan, think SIMPLE—as in the Savings
Incentive Match Plan for Employees, or SIMPLE
plan.
SIMPLE plans were designed specifically for
small businesses and their employees. Because of
their basic design features, they’re not subject
to the complex eligibility, testing and annual
reporting requirements associated with most
other types of qualified retirement plans (like
traditional 401(k) plans). This helps keep
administrative and other plan costs down to a
minimum.
There are two different types of SIMPLE plans:
- SIMPLE IRA—SIMPLE
IRAs work much like traditional IRAs. The
exception is that SIMPLE IRAs are set up by
the employer on behalf of each employee. Each
employee has his or her own account. SIMPLE
IRAs can be established as either a trust
account (by filling out form 5305-S) or a
custodial account (by filling out form
5305SA).
Both employees and employers make
contributions to SIMPLE IRAs. Employees can
contribute up to $9,000 per year in 2004 (or
$9,500 if they are 50 years of age or older).
Employers are required to make contributions
to employees’ accounts using one of two
formulas. You can match employee contributions
dollar-for-dollar up to 3 percent of the
employee’s compensation. Or you can make
non-elective contributions to an employee’s
account. Non-elective contributions are equal
to 2 percent of each employee’s salary. To
qualify, employees must receive at least
$5,000 in compensation during the year.
The employer’s contributions are
tax-deductible. The employee’s taxable income
is reduced by the amount of the contribution,
reducing his or her immediate tax liability.
- SIMPLE 401(k)—The
big benefit of a SIMPLE 401(k) plan is the
absence of strict and costly
non-discrimination testing requirements. Like
a SIMPLE IRA, employers are required to make
either matching or non-elective contributions
to employees’ SIMPLE 401(k) accounts. The
maximum contribution limits and employer
contribution formulas for the SIMPLE 401(k)
are the same as the SIMPLE IRA.
SIMPLE IRA and SIMPLE 401(k) plans are
available to companies (including
corporations, partnerships and sole
proprietorships) with 100 or fewer employees
that do not offer another employer-sponsored
retirement plan.
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