SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company1 What is it? SIMPLE stands for “Savings Incentive Match Plan for Employees” IRA means Individual Retirement Account (or Individual Retirement Annuity) Employer-sponsored plans in which contributions are made to IRAs owned by employees.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company2 When is it indicated? When the employer wants a plan that is easy to install and administer When the employer wants a simpler alternative to a qualified retirement plan When the employer has 100 or fewer employees (earning $5,000 or more in preceding year) When a self employed individual wants to save for retirement

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company3 Advantages Plan adoption can be accomplished by merely completing an IRS form. Benefits are entirely portable by participants, since they are in IRAs Participants benefit from positive investment performance (but risk of poor results) Funding achieved in part through salary deferrals by participants

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company4 Disadvantages Unlikely to provide an adequate retirement, particularly for employees who enter the plan at older ages Annual contributions restricted to lower amount--$11,500 in than would be available in certain other plans Employer may not maintain any other plan covering the same employees.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company5 Tax Implications Employer must have 100 or fewer employees In addition to $11,500 limit (in 2011) on salary reduction contribution, employees 50 or over may make catch-up contributions of up to $2,500 (in 2011). Employer must make either: –Dollar for dollar match contribution up to 3% of compensation, or –2% nonelective contribution for all eligible employees

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company6 Tax Implications (cont’d) A SIMPLE IRA may allow the maximum retirement plan contribution for a self-employed person with limited income, such as from moonlighting. This is because qualified plan contributions are subject to various percentage limits, but SIMPLE IRA contributions may include 100% of pay, up to the dollar limit.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company7 Tax Implications (cont’d) Employer with SIMPLE IRA cannot also have any other qualified plans Contributions are fully deductible to employer and excludable to employee if all foregoing requirements are met. Direct employer contributions not subject to FICA/FUTA, but salary reduction contributions are subject to FICA/FUTA. Application of state tax payroll tax depends on state law.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company8 Tax Implications (cont’d) Distributions generally treated like those from traditional IRA Exception: 10% early distribution penalty increases to 25% during first 2 years of participation Also during first 2 years, rollover from SIMPLE IRA to traditional IRA permitted only to distributions to which the 25% penalty would not apply. Saver’s credit may be available to lower income of participants

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company9 Tax Implications (cont’d) An individual cannot make deductible contributions to his or her own traditional IRA after reaching age 70½, but employers can make contributions (including both salary deferrals and matching contributions) to a SIMPLE IRA for employees over age 70½.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company10 Tax Implications (cont’d) A participant may still make otherwise allowable contributions to his or her traditional or Roth IRA. A SIMPLE IRA participant is an “active participant” for purposes of determining whether traditional IRA contributions are deductible, if any allocation is made to his or her account.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company11 How to Install a Plan Completion of appropriate form by employer is sufficient to adopt a SIMPLE IRA plan Form 5305-SIMPLE provides for a “designated financial institution” to hold participant investments Form 5304-SIMPLE does not provide for a designated financial institution Salary reduction elections must be made during a 60-day period prior to the start of a plan year for which the plan takes effect.

SIMPLE IRA Chapter 23 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company12 ERISA Requirements ERISA reporting and disclosure requirements are greatly simplified for SIMPLE IRA plans, particularly if Form SIMPLE or 5305-SIMPLE is used Annual report forms (Form 5500 series) are not required for SIMPLE IRAs