By Mary Ellen Schill
December 4, 2017
Workplace retirement programs play an important role in attracting and retaining employees, helping workers (and owners!) save, and provide significant tax advantages. Employer contributions to “qualified” plans (like 401(k) plans) or IRA-based plans are deductible by the business when made, and taxes on the recipients (your employees or even you!) are not imposed until the benefits are actually received. Even better, the contributions are invested in tax-exempt trusts, and so they grow tax-free.
Over the years the tax laws have made it easier for smaller employers like farms to sponsor qualified retirement programs (the safe harbor 401(k) plan is one such plan) and IRA-based plans such as a SIMPLE IRA plan. “Safe harbor” 401(k) plans and “SIMPLE” IRA programs provide the same tax advantages as their big brothers (immediate deductions for contributions and deferred taxation for participants), but have the added benefit of avoiding some of the nondiscrimination rules that apply to traditional qualified plans. Unfortunately, the lack of nondiscrimination rules means rather rigid rules about who must be able to participate and how often contributions must be made. For this article, we’ll focus on the SIMPLE IRA.
Any employer with 100 or fewer employees that does not sponsor any other retirement program can sponsor a SIMPLE IRA for its employees. There is a relatively “simple” tax form that is used to establish the program—the Form 5304-SIMPLE or the Form 5305-SIMPLE. A bank or other financial institution must be used as the depository for the IRA accounts. SIMPLE IRA programs allow both employer and pre-tax employee contributions. The employer can deduct its contributions when made.
As with all good things, there are limits on the contributions (both employer and employee). For 2017, each employee is limited to $12,500 in contributions, but any employee who is age 50 or older during 2017 can contribute an additional $3,000. As for employer contributions, there are two options, and each calendar year that the SIMPLE IRA is in effect, one or the other must be implemented. The first option is to match each employee’s contribution at a rate of 100% of the first 3% of compensation deferred. This matching contribution rate can be reduced to as low as 1% of compensation in any two out of five years of SIMPLE IRA sponsorship. Alternatively, the employer can contribute 2% of each eligible employee’s compensation (referred to as an employer “nonelective” contribution). Under either option, the amount of compensation that can be considered for each employee is limited; the limit for 2017 is $270,000.
All employee and employer contributions are immediately 100% vested when made. Employees are able to withdraw both their contributions and the employer’s contributions at any time, but any withdrawals are subject to income taxes AND an additional excise tax of 10% if withdrawn prior to attaining age 59½.
In addition to the contribution requirements for the SIMPLE IRA, there are also minimum coverage rules to consider. The employer must make the SIMPLE IRA available to any employee who has compensation from the employer of at least $5,000 in any prior two years and is reasonably expected to earn at least $5,000 in the current year. Owners can participate in the SIMPLE IRA program just like other employees.
Eligible employees must be notified annually (at least 60 days prior to January 1) of their ability to participate in the program and what contribution option the employer selected (matching contributions or nonelective contributions). Failure to give the required notice can have significant consequences. For example, the employer can be required to make a contribution in the amount of 1.5% of the employee’s compensation, plus earnings, and plus any missed matching contributions for any employee who did not get the required notice. So, an employer that sponsors a SIMPLE IRA must make sure all appropriate employee notices are given in a timely manner.
There are no annual filing requirements for an employer that sponsors a SIMPLE IRA program. Periodically the tax laws change and the IRS Form 5304-SIMPLE or Form 5305-SIMPLE must be updated, but typically the financial institution will notify the employer of the need to adopt an updated form.
Admit it, there are days when retirement seems a million years away. Unfortunately, no one has a million years to plan and invest for their life after work. Social Security cannot, and it was never intended to, be the sole source of retirement income for retired workers, especially if there is a need or desire to maintain one’s current standard of living. Maybe a SIMPLE-IRA program is right for your agri-business.
Reprinted with permission by Badger Common’Tater
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