As the name suggests, a SIMPLE – short for Savings Incentive Match Plan for Employees – is a simplified type of qualified retirement plan available to the self-employed and other small business owners. This type of plan has proven popular with its close cousin, the Simplified Employee Retirement (SEP), due to its ease of administration.
Icing on the cake: the implementation of each community for the improvement of retirement
The (SECURE) law provides additional tax incentives for the use of qualified plans such as SIMPLE. Notably, the SECURE Act increases the maximum credit available to start a plan to $5,000 and creates a new credit of up to $500 per year for auto-enrollment plans.
Before we go any further, know that you can set up one of two variations of a SINGLE, the IRA version or the 401(k) version, but the IRA version is much more common. For these purposes, we will refer to a SIMPLE as being synonymous with the SIMPLE-IRA version.
Basic premise: To qualify to use a SIMPLE, the company cannot employ more than 100 workers. This includes all employees who earned at least $5,000 in the previous year. An employee who has received at least $5,000 in compensation in the previous two years and who expects to receive at least that amount in the current year is also eligible to participate in the plan.. If you wish, your company can set up less restrictive eligibility requirements.
The contribution limits for SINGLES are adjusted annually. For 2022, eligible employees can choose to contribute up to $14,000. Additionally, an employee age 50 or older can add a “catch-up contribution” of $3,000, for a grand total of $17,000.
As a general rule, the employer must make voluntary matching contributions of up to 3% of remuneration (but not less than 1% in no more than two out of five years) or non-voluntary contributions of 2% of the remuneration of each eligible employee (based on a maximum compensation of $305,000 in 2022). These contributions are deductible by the employer.
Like SEPs, contributions to a SINGLE vest immediately. Thus, employees have the option of withdrawing funds from the plan at any time, but withdrawals made before the age of 59.5 are subject to a tax penalty, in addition to ordinary income tax, at unless a special tax exception applies.
Tax alert: Usually the penalty for early withdrawals from a qualifying plan is 10%, but this penalty is multiplied to 25% during the first two years of participation in a SIMPLE. After two years, early withdrawals will incur the standard penalty of 10%.
Additionally, the regular rules for Required Minimum Distributions (RMDs) apply after a SINGLE participant reaches age 72 (increased from age 70.5 by the SECURE law), as with other plans qualified. To continue the tax deferral, the funds can be transferred into a traditional IRA.
Know that time is on your side as a SIMPLE set-up before October 1, 2022 is effective for plan year 2022. This gives additional flexibility to a self-employed or other small business owner. Finally, you do not have to file an annual return for the plan. SIMPLE, right?