A SIMPLE IRA is a tax-deferred retirement plan that small companies can use to contribute to owners’ and employees’ retirement savings. Some small business owners find SIMPLE IRAs attractive because these plans have the same general rules as a traditional IRA. This makes SIMPLE IRAs easy for employers and employees to understand. If you want to establish one for your business, you must do so by the stated deadline.
A SIMPLE, savings incentive match plan for employees, IRA is a written arrangement that provides a simplified way to contribute to retirement income for employees and employers. Under a SIMPLE IRA, each employee must set up an IRA into which she can make salary deducted contributions. The employer must make either nonelective or matching contributions. A SIMPLE IRA plan adheres to the same rules as traditional IRAs for distribution, investment and rollovers.
Deadline to Set Up Plan
Small businesses can establish a SIMPLE IRA plan with an effective date any time between January 1 and October 1. The effective date must occur after you actually adopt the plan. This applies as long as the company, or parent or acquirer did not maintain a prior SIMPLE IRA plan. If your company previously maintained a SIMPLE IRA, then you must establish a new one effective as of January 1. If you created your company after October 1, the IRS allows you to set up a SIMPLE IRA plan as soon as it makes sense for your business.
Contributions, Timing and Calendar Years
The IRS mandates that a company must set up employees’ SIMPLE IRAs before the first date of any required contribution deposits. Companies must make nonelective or matching contributions by the company’s federal income tax filing deadline. Companies can extend this deadline by filing a tax return extension request. Companies can only maintain a SIMPLE IRA plan using a calendar year. The IRS strictly prohibits companies from using an alternate fiscal year.
Limitations and Deadlines
Because the SIMPLE IRA is a simplified plan, the IRS places a 100-employee limitation on employers. The grace period extends from the last calendar year in which the company was in full compliance. If you exceed the 100-employee limit due to an acquisition or similar transaction, then the IRS grants you an additional two years if you meet two conditions. First, plan coverage must not change significantly during the three-year period. Second, the plan would have continued to qualify if you remained a separate employer.
- IRS: SIMPLE IRA Plan FAQs – Establishing a SIMPLE IRA Plan [http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Establishing-a-SIMPLE-IRA-Plan]
- IRS: Publication 560 – Retirement Plans for Small Business [http://www.irs.gov/pub/irs-pdf/p560.pdf]