What Could Be Simpler?

SIMPLEs Make it Easier for Small Employers to Offer a Retirement Plan

One especially challenging task for smaller companies is to provide an employee retirement plan for their employees.  SIMPLEs – Savings Incentive Match Plans for Employees are much easier to set up, contribute to, and maintain.  A nominal financial investment is necessary when establishing a SIMPLE.  Once the plan is up and running, a financial institution can handle much of the administrative work.  SIMPLEs allow employees to save for their retirement on a tax-deferred basis through payroll deductions.

The Criteria

Your business will be required to meet certain conditions in order to be able to offer a SIMPLE to your employees.  For example, you must have no more than 100 employees who earned $5,000 (or more) in compensation during the preceding calendar year.  (All employees should be included, even if some do not meet the plan’s eligibility requirements.)  If your company creates a SIMPLE and later surpasses the 100-employee mark, the plan may remain in effect for up to two more years.

Generally, you will not be able to offer a SIMPLE if you are currently offering another retirement plan.  However, there are exceptions for employees covered under collective bargaining agreements, and for companies that participated in an acquisition or disposition during the year.

Major Decisions

One major decision you will face, is whether your business will select the financial institution to act as trustee for the plan, or whether employees will be able to select their own financial institution for receiving their contributions.  There are only certain types of financial institutions, such as banks and some insurance companies, which can act as SIMPLE trustees.

The trustees agree to invest the plan contributions received, typically in mutual funds.  The trustees also agree to be responsible for providing employers with information related to the plan year.

Another important decision is the creation and execution of the plan document.  The plan document should include the plan terms, such as eligibility criteria and employer contributions.  Either IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE can be used for this purpose.  IRS Form 5304-SIMPLE is used if each participant selects the financial institution receiving his or her plan contributions.  Whereas, IRS Form 5305-SIMPLE is used if the business deposits all contributions at a financial institution it designates.  Alternatively, some financial institutions have their own forms for employers to use.

Plan information must be provided to the employees by the employer.  The summary plan description (“SPD”) is in easy to explain language and summarizes the basics, such as eligibility requirements, benefits provided, and the name and address of the trustee.  Providing employees with copies of IRS Forms 5304-SIMPLE or 5305-SIMPLE would satisfy this requirement, or, you may elect that the financial institution provide the SPD to your employees.

In addition, an annual election notice which outlines each employee’s ability to make contributions through salary reduction, as well as the contributions made by the employers, must be provided to each employee.  As noted above, the IRS Forms 5304-SIMPLE or 5305-SIMPLE may be used.

Employer Contributions

Employers must contribute to their employees’ accounts once the SIMPLE is created.  The company has two options when making contributions:

  1. The employer matches each employee’s contributions up to 3% of their compensation, or
  2. The employer contributes 2% of each eligible employee’s compensation (up to a maximum compensation level of $260,000 in 2014).  This contribution occurs whether or not the employee makes a contribution.

The employer annually reviews the contribution options and is then required to inform the employees.

Employee Options

The employees are not required to contribute to their SIMPLEs, even if they are eligible.  If an employee chooses to contribute to his or her account, he or she may defer up to $12,000 in 2014, with the exception of those employees age 50 or older by the end of the tax year, who are allowed an additional $2,500 as “catch-up” contributions.  It is recommended that you check with your tax and benefits advisor for the latest information, as these limits may increase for 2015.

Once the contribution is in the employee’s SIMPLE account, it is 100% vested with the employee, whether it originated from employer or employee contributions.


These types of plans don’t require an extreme amount of time to administer and are relatively low costing, therefore, would be a great benefit which your company could offer to its employees.  Your tax and benefits advisors can help determine whether a SIMPLE is right for you, and, if so, walk you through the steps for setting one up.

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