Shara Fischer, Wealth Management Officer

Heartland Trust offers two of the most common types of employer-sponsored retirement plans: 401(k) and SIMPLEs. Both types of plans have many of the same features, but there are key differences that might make one a better fit for your business and employees. This article will cover the features of SIMPLE plans and next quarter we will take a closer look at 401(k) plans.


The Savings Incentive Match PLan for Employees (or SIMPLE) IRA lets you and your employees defer up to $14,000 of compensation in 2022, plus an extra $3,000 if age 50 or older. You promise to either match employee contributions dollar for dollar up to 3% of pay, or make a “nonelective” contribution for all eligible employees, whether or not they contribute, equal to 2% of pay. Note: The 3% of pay match may be reduced to as little as 1% in any two of five years. There is a limit of $305,000 of an employee’s pay can be taken into account when determining contributions in 2022.

Setting up a SIMPLE IRA plan

You can adopt a SIMPLE IRA plan if you have 100 or fewer employees (excluding employees who earned less than $5,000) and you don’t maintain or contribute to any other employer-sponsored retirement plan. If your business qualifies, follow these three simple steps to set up your SIMPLE IRA plan.

Step 1: Adopt a plan document

You can set up a SIMPLE IRA plan by completing either a pre-approved document provided by a financial institution or an IRS model document (either Form 5305-SIMPLE or Form 5304-SIMPLE).

Form 5305-SIMPLE lets you specify the “designated financial institution” that will both act as your plan’s custodian and initially receive all plan contributions. Form 5304-SIMPLE, on the other hand, lets each eligible employee select the financial institution that will serve as custodian and receive all plan contributions.

Step 2: Provide information to your employees

You must provide your eligible employees with the following information before the beginning of each election period:

The election period is generally the 60-day period prior to the start of each calendar year (November 2 to December 31). However, the election period will be different if you set up a SIMPLE plan mid-year, or if an employee first becomes eligible after the 60-day period ends. Forms 5304 and 5305 contain most of the documents you’ll need to comply with these notice requirements.

Step 3: Set up employee accounts

A SIMPLE IRA account must be set up by or for each eligible employee, and all contributions to the plan must go into these accounts. In general, you must include all employees who’ve earned at least $5,000 during any two preceding years and who are expected to earn at least $5,000 in the current year.

Advantages of a SIMPLE IRA plan:

Disadvantages:

Talk to your tax advisor and financial advisor prior to adding a retirement plan. We can help you review your situation and find a solution that fits your business. We’re always here to help.

 

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