Simple IRA Rules For Small Businesses

Article Written By: RebbecaMyers

Not as many people have heard of Simple IRAs, nor do they know the simple IRA rules or how they operate. It is an IRA-based plan that is generated toward small business owners and entrepreneurs and gives these small employers a simple way to make contributions to their employees' retirement accounts, as well as their own retirement account.

With this type of retirement account employees are able to choose to make contributions out of their paycheck and the employer can either match their contribution or will make a non-elective contribution. There are some restrictions on who can establish this type of plan; employers must have less than 100 employees that earned at least $5,000 the preceding year. The maximum of 100 employees takes into account all employees that worked for the business at any time during the year, whether they are eligible to participate in the plan or not. This also includes any self-employed individuals that earned any income from the employer the previous year.

There is a way for employers to impose eligibility requirements that are not as restrictive. They have the ability to reduce compensation requirements of the prior year, current year, or both to allow for employee participation. However, these are the only conditions an employer may impose.

In order to establish this type of plan, the first step is to adopting a prototype plan approved by the IRS, which are provided by insurance companies, banks, and other financial institutions. Second, each employee that is eligible must be given information about the plan and where their contributions will be deposited within a certain time frame, usually 2 months prior to January 1. Finally, a plan must be set up for eligible employees; it will be owned and controlled by the employee.

For employers wishing to set up this type of plan, remember that there is a deadline; it must be set up at any time before October 1. However, it may only be set up on the first day of January. Furthermore, a plan must be established before the first date a contribution is required to be deposited.

If there are employees that do not wish to participate in the plan they may choose to not make salary reduction contributions for one year, although they may not opt out of participation. If an employee does decide to opt out, they would not receive any matching contributions from the employer but they would receive the a non-elective contribution if the plan provides such.

There are some employees that may be excluded from the plan at the employers discretion. Examples would be employees that are non-resident aliens not earning income that constitutes as earned in come from US sources, certain employees covered under certain collective bargaining agreements approved by the Secretary of Labor.

There are no restrictions regarding the number of plans an employee can participate in per year. An employee may participate in plans with separate employers in the same year, however their salary contributions are subject to limitations.

If you are an employer and are interested in setting up this sort of plan and learning about simple IRA rules, there are many online resources to guide you and answer all of your questions. If you meet the criteria mentioned above, you may want to think about this type of retirement fund for your employees and yourself.

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