Simple IRA Laws
The SIMPLE IRA is the perfect retirement plan for people who are self employed or small businesses. In this type of retirement plan, an employee makes his contribution from his pre-tax salary and this contributed to be tax deferred until it is distributed. This type of contribution is known as elective deferral contribution. |
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However, even the employer has to make a contribution and he has two options. One is matching the employee's contribution but ensuring that the matching contribution does not exceed 3 percent of the employee's annual salary. The second option is that the employer makes a nonelective contribution that is 2 percent of the employee's salary. If an employee does not contribute for one year, the employer is still duty bound to make the contribution.
The SIMPLE IRA Laws govern that this type of retirement plan can only be established by small businesses that have 100 or less employees. In addition, the employees should have earned a minimum of $5,000 the previous year. Also, the employer should not have any other retirement plan be it SEP IRA, 401k, 403b or employee funded pension trusts.
The number of employees cannot exceed 100 for the year the SIMPLE IRA is maintained. However, if the employee count goes beyond 100, the employer can still maintain the SIMPLE IRA for two more years after the first year of increase. Thereafter, the employer cannot maintain the SIMPLE IRA.
Any employee who drew a compensation of $5,000 in the preceding year is eligible to participate in a SIMPLE IRA. However, there are certain employees who cannot participate, and these include employees who get benefits through a collective bargaining agreement and non-resident alien employees who receive no compensation for their services.
An employer has to establish a SIMPLE IRA between January 1 and October 1 for the year in which the SIMPLE IRA has to become operational. However, this rule does not apply to a business which is established after October 1. Here, the employer should try to establish the SIMPLE IRA as soon as possible.
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