There are many medium size companies who would like to offer a retirement plan to their employees, but do not want to spend thousands of dollars doing so. 401K plans can be rather expensive to maintain and because SEP-IRA’s are 100% employer funded it makes it an unfeasible plan. The Saving Incentive Match Plans for Employees (SIMPLE) was created in 1996 and allows these mid-size companies, no more than 100 employees, to offer an affordable retirement plan to eligible employees. The maximum eligibility requirements that can be placed on a SIMPLE-IRA is, the employee must be 21 years of age and has earned $5000 in the proceeding two years. If these requirements are met than the employee cannot be excluded unless they belong to a union or are a nonresident alien. Currently the contribution limits for a SIMPLE-IRA is $9,000 and set to be raise to $10,000 in 2005. There is also a catch up clause which allows participants the ability to contribute an additional $1500 in 2004 and $2000 in 2005. Employers must also contribute to the plan and can elect to contribute 1-3% of the employee’s annual salary, and this contribution is 100% deductible by the employer.
The employee contributions are pre taxed dollars which can lower the taxable income of an employee. Because these contributions are taken out of an employees pay check by the employer they have an absolute dead line to send this money into the investment company. This dead line is 30 days after the month the deferral had taken place. Once the funds have reached the employees account they are considered to be 100% vested and have no restrictions on moving money out of their account by the employer, but are responsible for the income tax the distribution may generate and any penalties. The penalties and taxes may be waived if the distribution is rolled over into another qualified retirement plan. In addition to rolling funds into another qualified plan SIPLE-IRA distributions may be used penalty free if used for certain expenses such as education, medical, first time home purchase, or the employee become disabled. As with the SEP-IRA the SIMPLE-IRA does not include a provision for an employee to take out a loan against the balance of the account.
One reason the SIMPLE-IRA has become popular with employers is that there is relatively no fees associated with it to the employer. Most companies do not charge any sort of initiation fees and because the accounts are owned by the employees any annual fees are charged to the account holder, which is the employee. Plans like the SIMPLE and SEP IRA’s have helped relatively small employers to acquire and retain valuable employees at a minimal cost.