Updated: Jul 7, 2021
The Simple IRA
For small businesses, one benefit for employees that is often overlooked is a retirement plan. If a business owner has less than 100 employees, a SIMPLE IRA plan is worth considering. Keep Your Employees Happy
Any business owner will tell you that good help is hard to come by. In order to keep that “good help,” it often means offering a benefits package to attract and retain talent. Large companies that offer medical benefits and retirement plans along with competitive wages often lure employees away from the smaller companies that don’t offer any long-term benefits. Many times business owners could offer some type of plan, but don’t have the time to hassle with it, or think it will just be too expensive to offer. However, a SIMPLE IRA (Savings Incentive Match Plan for Employees) is appropriately named, and usually has very little cost (if any) to set up.
An employer can choose to make a mandatory 2% contribution (based on gross income) to all eligible employees, or a 3% optional matching contribution to any eligible employee who chooses to participate.
An eligible employee must have earned $5,000 in compensation in any two preceding years and is expected to earn at least $5,000 in the current year. Employers can be less restrictive if they wish.
Employees can contribute up to $13,500 annually and an extra $3,000 at age 50 and up for 2020.
Like with any other IRA, there is a 10% penalty for a distribution before age 59 1/2, and a 25% penalty for a distribution within the first two years of starting the plan.
Benefits To The Owner
A small business owner is always having to count the cost in any decision they make. As mentioned earlier, keeping good employees is hard, and one way to help sweeten the deal is to offer a retirement plan. If an employee makes $70,000 a year, a 3% matching contribution would equate to $2,100. That may seem like a sizable amount, especially if accounting for multiple employees, but that contribution is also a tax deduction for the employer. Plus, the business owner is also able to participate. An employer investing a little more into their workforce not only can help them save for retirement, but give themselves more tax deductions. In addition, the “Secure Act” passed at the end of 2019, allows the employer to receive a maximum $500 tax credit each year if the employer establishes a 401(k) or SIMPLE IRA plan with automatic enrollment.
If a company does not already have a plan in place, this year would be a great time to start. If you have any questions about the SIMPLE IRA and how it could work for your business, contact us today to set up a consultation.
Content in this article is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.