A SIMPLE WAY TO OFFER RETIREMENT

By

Janet Fox Kreielsheimer

SIMPLE plans are a lowcost alternative retirement program for employers who cannot sponsor a 401(k). The plan was introduced as part of the Small Business Job Protection Act.

Most of life's greatest rewards are the result of careful planning, and retirement is no different. Planning for retirement is one of the most critical challenges facing Americans today. Yet, many Americans are not adequately prepared.

The Savings Incentive Match Plan for Employees (SIMPLE) was introduced by a provision of the Small Business Job Protection Act of 1996 as a unique way for Small Businesses to provide retirement plans for employees.

The plan is primarily employee funded with matching contribution requirements. It provides a low cost alternative for employers who cannot sponsor a 401(k) plan, but still want to offer a retirement program. As the employer you have very few administrative duties and there are no discrimination tests or Form 5500 reporting requirements. The SIMPLE is different from a traditional 401(k) plan in that there are very few administrative and record keeping costs.

The real question becomes one of "Is your company eligible for a SIMPLE IRA Plan?" You must determine whether or not your business is eligible to establish a SIMPLE IRS Plan. First and foremost, this plan is for businesses with 100 or fewer employees whose compensation during any two preceding years has been at least $5,000.00 and expects to earn this amount during the current year.

This may in fact exclude certain employees. In general the plan helps the business owner maintain employee retention, but a firm with high turnover might not be interested since all contributions into the plan by both the employee and employer are vested immediately. Since departing employees are entitled to those contributions, no forfeitures are available to offset employer contributions.

By contributing into a SIMPLE IRA you and your employees can see an immediate difference because you can reduce your current taxes. In addition, all earnings in your account are tax sheltered, meaning they are not taxed until withdrawn.

Contributions into the plan are flexible and each employee including the business owner specifies the percentage of their pay to be withheld and deposited into their account each year. Participants can defer up to a maximum of $6,000.00 annually (assuming they earn at least $6,000.00).

In addition, an employer must make either matching contributions, generally dollar-for-dollar up to 3 percent of each participant's compensation, or nonelective contributions, equal to 2 percent of each participant's compensation. (For purposes of the 2 percent nonelective contribution, compensation is capped at $160,000 for tax year 1997). The match may be reduced under certain conditions.

The mandatory employer contributions, including those for the business owner, can safeguard against the complex and often costly testing requirements of qualified plans. Since this is similar to a regular IRA normal IRA rules generally apply regarding distributions from the accounts and money withdrawn prior to age 59 ½ are generally subject to early distribution penalties.

To learn more about the SIMPLE-IRA and its use as an additional employee benefit at your firm you might want to contact your tax advisor or financial consultant. As we are all very well aware of, employee retention is critical and benefits are becoming more important to those seeking employment in these turbulent economic times of company downsizing and mergers. High turnover and continuous training of new employees can be costly and time consuming for any employer.

Janet Fox Kreilsheimer is president of ACH Investment Group Inc. in Raleigh. She can be reached at 571-3435. Reprinted with permission from The Triangle Business Journal.