SIMPLE (Savings Incentive Match Plan for Employees)

What is a SIMPLE?

The SIMPLE is a plan for small businesses with 100 or fewer employees who have no other qualified plans. It's popular with investors who pay themselves less than $45,000 per year. With a SIMPLE plan, contributions are tax deductible, and earnings within the account are tax free until withdrawal.

SIMPLE Contribution Limits

A SIMPLE allows employee contributions of up to $11,500 if you're under age 50, and up to $14,000 if you're 50 or over in 2009 and 2010. See a full list of contribution limits for all Equity Trust IRAs and retirement plans.

Employer Matching Contributions.

Employers are generally required to match each employee's salary reduction contributions, on a dollar-for-dollar basis, up to 3% of the employee's compensation.

Deducting Contributions

You can deduct SIMPLE contributions for the tax year within which the contributions were made.

 

SIMPLE Eligibility

You can set up a SIMPLE IRA plan if you meet BOTH of these requirements:

• You meet the employee limit.
• You do not maintain another qualified plan, unless the other plan is for collective bargaining employees.

Employee Limit

You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Under this rule, you must take into account all employees who were employed at any time during the calendar year, regardless of whether they're eligible to participate.

The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year in which the SIMPLE IRA plan becomes effective.

Setting Up a SIMPLE IRA

SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for each eligible employee. The particpant and trustee (or custodian) can use the following model trust and custodial account documents to set up the SIMPLE:

• Forms 5305-S, SIMPLE Individual Retirement Trust Account
• 5305-SA, SIMPLE Individual Retirement Custodial Account

SIMPLE Rules

The rules and guidelines for SIMPLE IRAs are from IRS Publication 560 and 590. These deal with qualified plans, individual IRAs, and Roth IRAs.

If you don't follow the rules set forth for SIMPLE IRAs, the tax-deferred status of the account could be questioned. This could lead to disqualification of the IRA and severe tax consequences.

Prohibited transactions and investments in a SIMPLE IRA are clearly definited by the IRS.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your SIMPLE or IRA or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a SIMPLE IRA.

• Borrowing money from it
• Selling property to it
• Receiving unreasonable compensation for managing it
• Using it as security for a loan
• Buying property for personal use (present or future) with IRA funds

Fiduciary

For IRA purposes, a fiduciary is someone who does any of the following.

• Exercises any discretionary authority or discretionary control in managing your IRA, or exercises any authority or control in managing or disposing of your IRA assets
• Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so
• Has any discretionary authority or discretionary responsibility in administering your IRA

Prohibited Transactions - Investment in Collectibles

If your SIMPLE IRA invests in collectibles, the amount invested is considered to be distributed to you in the year it was invested. You may also have to pay the 10% additional tax on early distributions.

Collectibles include:

• Artworks
• Rugs
• Antiques,
• Metals
• Gems
• Stamps
• Coins
• Alcoholic beverages
• Certain other tangible personal property

Exceptions

Your SIMPLE can invest in the following:

• Gold coins of one, one-half, one-quarter, or one-tenth ounce minted by the U.S. Treasury Department
• One-ounce silver coins minted by the Treasury Department
• Certain platinum coins
• Certain gold, silver, palladium, and platinum bullion

Distributions (Withdrawals)

Distributions from a SIMPLE IRA are subject to IRA rules and generally are included in income for the year in which they're received. Click here for IRA distribution rules.