Attracting, retaining and motivating great employees is key to the success of a business, and traditional 401(k) plans may not be the right fit for your company. A SIMPLE IRA may be your best bet.
Savvy business owners know all about competition, and they know that they're not only competing for the best customers, they're competing for the best employees as well. One of the most powerful ways to attract, keep and motivate employees, of course, is a solid company retirement plan.
"I know 401(k) plans help attract good people, but the costs, administration and red tape are just too much for me right now" is a common concern for many small and mid-size business owners. A survey by the Bureau of Labor Statistics shows that only 53 percent of workers at companies with fewer than 100 employees have access to a company retirement plan. That figure drops to just 48 percent at companies with fewer than 50 employees.
A survey conducted by Towers Watson indicates that roughly 30 percent of employees report that a company's retirement/health care program was "an important reason" why they decided to work for their current employer, and nearly half of those employees cite having their retirement and health care plan as "an important reason I will stay with my current employer." No surprise there.
So how can a small to mid-size employer attract and retain good people if a 401(k) isn't right for them? The good news is that these business owners have other options, and the best option of all may be a SIMPLE IRA plan.
A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a qualified business retirement plan that allows a business owner to offer a retirement plan to which employees can contribute, receive matching funds, invest for retirement, and enjoy tax advantages, all without the costs and administrative hassles of 401(k) plans.
First, the SIMPLE IRA ground rules:
- They can be opened by any small business with 100 or fewer employees and that includes all employees employed during the calendar year, regardless of whether they are participating in the plan. Employees must have earned a minimum of $5,000 during the preceding year, and the employer cannot be maintaining any other regular qualified plans, such as SEP plans, 401(k), defined benefit plans and others.
- The employer can contribute in one of two ways. First, you can match the first 3 percent of employee contributions on a dollar-for-dollar basis. Or you can contribute 2 percent for all eligible employees whether they participate or not. It has been our experience that employers prefer the 3 percent matching contribution for employees who are contributing.
- Employer contributions are usually considered a deductible business expense. Also, all contributions (both those of the employer and employee) are 100 percent vested immediately, unlike 401(k) plans that allow a vesting schedule. Contributions are invested within a menu of mutual funds within the plan.
- Employee contribution maximums for 2017 (they can increase each calendar year or stay the same, per IRS/IRC 415) are $12,500 for employees up to age 50, and $15,500 for those 50 and above. Under those limits, an employee can defer up to 100 percent of their income. If the employer chooses to contribute 2 percent for all eligible employees, that maximum is limited to the compensation maximum of $270,000, meaning the maximum employer contribution, in that case, is $54,000.
- The contribution maximum is the primary area in which a SIMPLE IRA can lag behind a traditional 401(k), especially for a business owner and/or their key employees. For business owners who use a SIMPLE IRA for their company and would either like to contribute more for their retirement or reward and motivate key employees, there are several non-qualified options available to them.
Opening a SIMPLE is, of course, simple. They're described in IRS Publication 4334, and you'll simply complete and submit Form 5305-SIMPLE (if you’re going to designate a financial institution for the contributions) or Form 5304-SIMPLE (if you’re not going to designate a financial institution). Of course, bringing in a financial advisor will make the process even easier, and they’ll be able to shop for a good financial company for you and also coordinate educational and enrollment processes.
Once the required paperwork is submitted, you'll notify your employees of the plan, their opportunity to participate in the plan, your matching contributions, the rules of the plan, a summary description of the plan from the financial institution being used and written notice that the employee can transfer their balance without cost or penalty if you are using a designated financial institution. After two years of participation, a SIMPLE IRA can be transferred into a regular IRA. The election period lasts 60 days.
You want to stay on top of current SIMPLE IRA laws and requirements, so you’ll want to review the plan annually to confirm that you're operating it properly. The IRS offers a helpful document called the "SIMPLE IRA Plan Checklist," Publication 4284, that walks you through that process.
Is attracting, retaining, rewarding and motivating great employees worth a 3 percent matching contribution for plan participants, with little extra cost and administration? Most likely. And a SIMPLE IRA may be tailor made for your company.
- "Employee Benefits in the United States - March 2016." Bureau of Labor Statistics. July & aug., 2016. https://www.bls.gov/news.release/pdf/ebs2.pdf.
- Gardner, Jonathan, and Steve Nyce. "Attracting and Keeping Employees: The Strategic Value of Employee Benefits." Willis Towers Watson. May 28, 2014. Accessed June 29, 2017. https://www.towerswatson.com/en-us/insights/newsletters/americas/insider/2014/attracting-and-keeping-employees-strategic-value-of-employee-benefits.