What Is a SIMPLE IRA and How Does It Work?
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is an employer-sponsored retirement plan designed specifically for small businesses with 100 or fewer employees who earn at least $5,000 a year. Like its name, it truly is simple to set up and administer.
Most banks and financial institutions have IRS-approved prototype plans you can use; plan setup usually can be done by completing just one form. Communicate the plan details to your employees, and you are good to go.
You and your employees can choose to make regular pre-tax contributions through automatic payroll deductions, and invest them in a tax-deferred retirement account, much like a 401(k). You, as the employer, must help your employees save by making one of the following contributions to their accounts:
- A dollar-for-dollar matching contribution of up to 3% of employee compensation; or
- A non-elective contribution of 2% of employee compensation, made to all eligible employees even if they don’t make their own contributions.