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SIMPLE-IRA

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Savings Incentive Match Plan for Employees of Small Employers

Designed to make it easier for small businesses to offer a tax-advantaged, company-sponsored retirement plan, the SIMPLE-IRA Plan is a flexible, easy to administer retirement plan for businesses with 100 or fewer eligible employees. SIMPLE plans are funded by employer contributions and can be funded by elective employee salary deferrals.

Plan Eligibility

Generally, any small business that employs 100 or fewer employees who earned at least $5,000 in the preceding year can establish a SIMPLE-IRA plan, provided the employer does not concurrently maintain any other employer-sponsored retirement plan. Once you know that your company can establish a SIMPLE-IRA plan, you need to determine employee eligibility.

Eligible employees include those who have earned at least $5,000 in compensation from the employer in any two preceding years (whether or not consecutive), and are reasonably expected to earn $5,000 during the current year.

While employers cannot make these eligibility requirements more restrictive, they can generally liberalize them to include more employees.

Tax Advantages

As an employer, you may be able to deduct contributions you make on behalf of your plan participants from your business expenses.

As a participant, you and any eligible employees can elect to defer part of your salary and direct that money into an individual SIMPLE-IRA. Because these contributions are deferred before certain taxes are withheld, they actually reduce contributing participants' taxable income.

Any earnings within a SIMPLE-IRA enjoy tax-deferred growth until withdrawn.

Establishment deadlines

Employers who want to establish a SIMPLE-IRA plan for the current tax year must set up the plan and notify employees by October 1 of the current tax year. (An exception applies for businesses which are established after October 1).

Contribution Flexibility

  • Employee contributions — Eligible employees can elect to contribute up to 100% of compensation up to a maximum of $12,000 for the 2014 plan year through salary reduction. (The amount elected by the employee may be expressed as a percentage of compensation or as a specific dollar amount.) Employees age 50 and over can make additional catch-up contributions up to $2,500.
  • Employer contributions — Employers can choose from two different contribution methods — and can even switch between these options each year, provided certain notification requirements are met.
  • Matching option — requires employer to match each participant's contributions dollar-for-dollar — up to 3% of compensation but no more than $12,000 for the 2014 plan year. Also allows the employer to reduce the employer's match to as little as 1% of each participant's compensation for any two years in a five-year period.
  • Non-elective contribution option — requires employer to contribute 2% of each eligible employee's compensation each year — up to a maximum of $5,200 regardless of whether the participant contributes or not (the maximum annual compensation on which contributions can be based is $260,000).

Other Key Advantages

  • Low cost and minimal administrative requirements
  • No special plan-level tax reporting is required for the employer each year
  • No discrimination testing required
  • No need to track vesting, since all contributions are immediately 100% vested (which means each employee owns all of the assets in his or her SIMPLE-IRA immediately and can take these assets with them if leaving the company.)

Step by Step: Setting Up a SIMPLE-IRA

Employer

The following steps need to be completed:

  1. Fill out and sign IRS Form 5305-SIMPLE

    This fundamental form for the SIMPLE plan certifies and records your decisions in the formation of your SIMPLE plan. This form does not need to be filed with the IRS, only kept for your, and Saturna's, records.

  2. Complete the Notice to Eligible Employees and have employees complete the Salary Reduction Agreement

    These documents allow employees to indicate how much of their salary they will contribute to their IRA for the course of the year. It also acts as your proof from the employee that he/she wishes to have part of their salary directed to an IRA. This form should be kept for your records.

  3. Have each employee in the plan fill out and sign a Saturna SIMPLE-IRA Application

    This document establishes the IRA with Saturna that is contributed to by both the employer and the employee. It allows for the employee to choose how they would like their IRA to be invested, and to indicate beneficiaries. The employee should retain the Saturna IRA Brochure, as it includes valuable information regarding our plans. This application needs to be signed and returned to Saturna Capital.

  4. Have each employee in the plan fill out and sign a IRS Form 5305-SA

    This document establishes the employee's IRA with the IRS. This document needs to be signed and returned to Saturna Capital Corporation.

Employee

The following steps need to be completed:

  1. Fill out and sign the Salary Reduction Agreement
    • Indicate Amount of Elected Salary Reduction
    • Indicate Date for Salary Reduction to Begin
    • Sign and Date
  2. Fill out and sign the SIMPLE-IRA Application
    • Enter Name, Address, DOB, SSN
    • Indicate Primary Beneficiary Designation
    • Choose a fund(s) to invest in
    • Include a copy of government-issued identity document
    • Sign and Date
  3. Fill out and sign the IRS Form 5305-SA
    • Put Name, Address, DOB, and SSN info in boxes
    • Sign the form
  4. Return all documents to your company's administrator