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Compare SEP-IRA vs. SIMPLE-IRA vs. 401(k) Plans

Savings Incentive Match Plan for Employees of Small Employers

Designed to make it easier for small businesses to offer a tax-advantaged, company-sponsored retirement plan, the SIMPLE-IRA Plan is a flexible, easy to administer retirement plan for businesses with 100 or fewer employees. SIMPLE plans are funded by employer contributions and can be funded by elective employee salary deferrals.

Plan Eligibility

Generally, any small business that employs 100 or fewer employees who earned at least $5,000 in the preceding year can establish a SIMPLE-IRA plan, provided the employer does not concurrently maintain any other employer-sponsored retirement plan. Once you know that your company can establish a SIMPLE-IRA plan, you need to determine employee eligibility.

Eligible employees include those who have earned at least $5,000 in compensation from the employer in any two preceding years (whether or not consecutive), and are reasonably expected to earn $5,000 during the current year.

While employers cannot make these eligibility requirements more restrictive, they can generally liberalize them to include more employees.

Tax Advantages

As an employer, you may be able to deduct any contributions you make on behalf of your plan participants from your business expenses.

As a participant, you and any eligible employees may elect to defer part of your salary and direct that money into an individual SIMPLE-IRA. Because these contributions are made before certain taxes are withheld, they actually reduce a contributing participant’s taxable income.

Any earnings within a SIMPLE-IRA enjoy tax-deferred growth until withdrawn.

Establishment Deadlines

Employers who want to establish a SIMPLE-IRA plan for the current tax year must set up the plan and notify employees by October 1 of the current tax year. (An exception applies for businesses which are established after October 1.)

Contributions Flexibility
  • Employee contributions - Eligible employees can elect to contribute up to 100% of compensation (up to a maximum of $12,000 for the 2013 plan year) through salary reduction. (The amount elected by the employee may be expressed as a percentage of compensation or as a specific dollar amount.) Employees age 50 and over may make additional catch up contributions up to $2,500 (for 2013).
  • Employer contributions - Employers can choose from two different contribution methods - and can even switch between these options each year, provided certain notification requirements are met:
    • Matching option - requires employer to match each participant’s contributions dollar-for-dollar - up to 3% of compensation but no more than $12,000 for the 2013 plan year. This option also allows the employer to reduce the match to as little as 1% of each participant’s compensation for any two years in a five-year period.
    • Non-elective contribution option - requires employers to contribute 2% of each eligible employee’s compensation each year - up to a maximum of $5,100 for 2013 regardless of whether the participant contributes or not (the maximum annual compensation on which contributions can be based is currently $255,000 for 2013).
Other Key Advantages
  • Low cost and minimum administrative requirements
  • No special plan-level tax reporting is required for the employer each year
  • No discrimination testing required
  • No need to track vesting, since all contributions are immediately 100% vested (which means each employee owns all of the assets in his or her SIMPLE-IRA immediately and can take these assets with them if leaving the company).