SIMPLE (Savings Incentive Match Plan for Employees) IRA Plan
How to set up a SIMPLE IRA plan
You can set up a SIMPLE IRA plan for your business if you had 100 or fewer employees who received at least $5,000 in compensation for the preceding year. Once established, the employees eligible to participate in the plan are those who received at least $5,000 in compensation during any 2 years preceding establishment of the plan, and who are reasonably expected to receive at least $5,000 in compensation during the current year. These are the most restrictive conditions you can apply. You can establish less restrictive requirements to allow more employees to participate, for example by setting the compensation level at less than $5,000.
Like the SEP plan, a SIMPLE plan must be a written arrangement. Financial institutions can help you set up the plan. You can also use the IRS model on Form Form 5304-SIMPLE or Form 5305-SIMPLE. Which form you use depends on whether you select one financial institution where the business will make all the contributions, or you let your employees select their own financial institution where they want to receive the contributions. Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her plan contributions, and Form 5305-SIMPLE if you require that all contributions be deposited initially at a financial institution that you, as the employer, designate. The SIMPLE IRA plan is adopted when you have completed the form and you as the employer and the designated financial institution, if applicable, have signed it. Keep the original form for your records. You do not need to file it with the IRS.
All employees will need to have SIMPLE IRAs set up for them. The IRS provides model formats that can be used for this purpose: Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account. Roth IRAs set up by employees do not qualify to receive contributions under a SIMPLE plan.
When you adopt a SIMPLE IRA plan, you need to notify the employees of the following:
The employees’ option to decide how much of their salary they want contributed to the plan, and to change that amount
Your choice, as employer, whether you make matching contributions or nonelective contributions that you determine
A summary description of the plan
Written notice that employees can transfer their balances from a financial insitution that you designate, without incurring any cost or penalty