Setting up a Simple IRA

I would appreciate your interpretation of the following instructions concerning a Simple IRA. The situation is as follows: Sole proprietor has

3 employees none of which are interested in joining the Simple plan. The proprietor was told that he can still contribute to the plan for himself along with matching deductible funds from the business and does not have to contribute anything for the employees. The following is a quote from Kiplinger.

"If you have employees, you must include them in your plan and match their contributions dollar for dollar up to 3% of compensation OR contribute 2% of every employees' salary -- even for those who don't kick in money themselves."

He was told that since the employees do not make any contributions that he in fact is matching $0.00 up to 3% and therefore meets the requirements of the plan and he is allowed to contribute to his own account without contributing anything for the employees.

Thanks for your interpretations.

George L Anthony

Reply to
George Anthony
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The interpretation is correct. An employer can choose either method when setting up the plan: Matching employee contributions (3%) or the nonelective employer contribution (2%). If the employer selects the matching method and no employee is an active particpant (i.e., no employee asks to have part of their pay contributed to the plan) then the employer does not have to contribute anything to the plan for the employees.

One must way the risk inherent in selecting the matching method. This method puts the employer on the hook to match up to 3%. The other method only puts the employer on the hook for 2%. With 3 employees, the cost can be zero to 9% of salaries using the matching method depending upon how many active participants there are. The mandatory contribution method would have a known fixed cost of 6% of salaries for the employees.

Reply to
Alan

He was told correctly - ASSUMING he made the proper election when he completed the 5404/5405 Form when he established the plan. Check the plan document and see what it says.

In setting up SIMPLE IRA plans you need to analyze the salaries being paid and the size of the company. The 3% match BUT only for those who participate is a great deal IF no one but the owner is making a big salary and no one but the owner wants to participate. BUT if you have an employee who for some reason decides to participate it will cost the owner 3%.

On the other hand, if there are few employees and their pay is relatively low it can LOOK like choosing the 3% match is good idea - since the employer doesn't have to put anything in if they don't put anything in. BUT consider this - would it be better for the employer to put 2% into a SIMPLE IRA for every employee INSTEAD of giving them a raise each year?

A SIMPLE IRA contribution of 2%, even IF he also gives a small raise, means he gives them more money BUT does it free of FICA taxes AND it doesn't raise his worker's comp or unemployment premiums on the SIMPLE IRA match.

Just something to think about, Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

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