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Retirement Saving Options for Your Small Business: SIMPLE Plans

A Savings Incentive Match Plan for Employees (SIMPLE) is a tax-advantaged retirement plan designed for small businesses with 100 or fewer employees. These plans allow employees to contribute to their retirement savings while requiring employers to make mandatory contributions. In this blog, we’ll cover the key features, contribution limits, and considerations for implementing a SIMPLE plan in your business.

Eligibility and Requirements for SIMPLE Plans

To establish a SIMPLE plan, a business must meet specific criteria:

  • Small Business Requirement: Only businesses with 100 or fewer employees who earned at least $5,000 in the preceding year can set up a SIMPLE plan.
  • Employee Contributions: Employees can contribute a portion of their salary to their SIMPLE IRA or SIMPLE 401(k) through a qualified salary reduction arrangement.
  • Employer Contributions: Employers are required to contribute either:
    • A dollar-for-dollar match of employee contributions up to 3% of the employee’s salary.
    • A nonelective contribution of 2% of each eligible employee’s salary, regardless of whether the employee contributes.

SIMPLE IRA vs. SIMPLE 401(k)

There are two types of SIMPLE plans, each with distinct advantages:

  • SIMPLE IRA: Easier to set up and maintain than traditional qualified retirement plans, requiring fewer regulatory filings.
  • SIMPLE 401(k): Functions similarly to a regular 401(k) but is exempt from complex nondiscrimination testing, making it a more accessible option for small businesses.

Contribution Limits for 2024

SIMPLE plans have annual contribution limits that change over time. For 2024:

  • Employees can defer up to $16,000 from their salary (up from $15,500 in 2023).
  • Employees aged 50 and older can make an additional $3,500 in catch-up contributions.

Key Considerations for Employers

Before choosing a SIMPLE plan, small business owners should consider:

  • Mandatory Employer Contributions: Unlike some other retirement plans, SIMPLE plans require employers to contribute each year.
  • Setup and Administration: While simpler than traditional 401(k) plans, there are still administrative responsibilities, such as ensuring timely contributions.
  • Limited Contribution Flexibility: Compared to SEP IRAs or traditional 401(k)s, SIMPLE plans have lower contribution limits and fewer customization options.

Conclusion

For small business owners, a SIMPLE plan can be an excellent way to offer retirement benefits while ensuring compliance with contribution requirements. If you’re interested in learning more about SIMPLE plans or need assistance in setting one up, contact Guerrero CPA at 210-490-7100. Our team is ready to help you navigate the eligibility requirements, paperwork, and additional details to maximize your retirement benefits.