Ever wonder how some of your peers offer expensive benefits packages to their employees and manage to stay afloat? Have you thought about putting a retirement plan into place to reward your employees, but gotten stuck navigating complicated filing requirements and trying to make sense of confusing language like ERISA, Third Party Administrator, and Form 5500?
The IRS recognizes that it can be both costly and time consuming to set up a 401(k) plan if you’re a small business. Complicated rules such as avoiding being “top-heavy,” choosing between profit-sharing options versus matching options, and high startup costs can be seemingly insurmountable hurdles to putting a retirement plan into place.
For those businesses looking to avoid the complicated, the IRS has a solution – the (appropriately named) Simple IRA. Simple stands for Savings Incentive Match Plan for Employees. It is intended to be an easy, cost-effective way for employers with fewer than 100 employees to reward them and provide access to a retirement plan for their future security.
Unlike the traditional 401(k), a Simple IRA has no annual filing requirements. This might not sound like a big deal, until you see what the form 5500 looks like. Not a lot of fun to have to think about every year. And potentially even less fun to pay someone (a third party administrator) to do.
In addition, most Simple IRAs can be set up with no start up fees to the employer. It’s not uncommon for a mutual fund company to to charge a flat fee in addition to what the third party administrator charges for its services for a 401(k). If an employer intended to offer a match, that’s two gatekeepers she has to pay just to offer her employees free money. Not so with a Simple IRA.
For all their simplicity, there are some trade-offs employers should consider carefully before establishing a Simple IRA.
When establishing Simple IRA plans, employers have the choice to either offer every employee 2% of his pay, or a 3% match if he puts in 3%. For example, if Joe employee makes $50,000 per year, the employer has the option to a) put in $1,000 (2% of Joe’s pay) on top of Joe’s salary, or b) match up to $1500 if Joe puts in $1500 of his own money. Either way, the employer is on the hook to make contributions, and can only reduce the match twice in a 5 year period.
Additionally, all employees are always 100% vested. That means that the match the employer makes is the employee’s to keep forever, even if they leave the next day. This is quite a contrast to vesting schedules in 401(k) plans, which are designed to give employees incentive to stay – or risk losing some of their 401(k) matching. The even bigger pitfall here is if an employee leaves mid-year and the employer is offering a flat 2% non-elective contribution, because the employer is required to make good on that contribution.
While higher than IRAs, Simple IRA contribution limits are lower than those of 401(k) plans – $13,000 for 2019, compared to $19,000 for 401(k) plans. If there are quite a few employees over the age 50, then you’ll want to consider whether the lower catch-up contribution limit would be detrimental to those getting started saving late.
The Bottom Line
We’ve only scratched the surface of the ins and outs and of Simple IRAs, their pros and cons, and how they compare to 401(k) plans. If you’re an employer, it’s important to weigh your options carefully before implementing a retirement plan. Not sure where to get started? Check out “Help with choosing a retirement plan” on the IRS’s website, or contact us today to get answers so you can decide what type of plan is best for you.