If you're considering a retirement plan for yourself and your employees, you might want to review the advantages of a SIMPLE-IRA (Savings Incentive Match Plan for Employees). Remodelers who have set one up say it is suitable for small businesses and relatively easy to administer.

Christine and Steve Ramaekers considered several retirement plan options for Mainstreet Restorations & Remodeling, their 10-employee company in Birmingham, Mich. They chose a SIMPLE-IRA for its ease of administration. The financial institution takes care of most of the paperwork and the plan does not require tax filing or third-party compliance testing. Christine participated in a 401(k) plan with a previous employer, but she was not fully vested for seven years. She likes that with the SIMPLE plan, employees are immediately 100% vested.

At the time the company put the program in place, Ramaekers was looking for a way to attract employees. “This program is good to lure prospective employees, good for us personally, and advantageous for our existing employees,” she says.

Jeb Breithaupt, owner of Jeb Breithaupt Design Build, in Shreveport, La., previously set up a 401(k) plan for his employees, but says the SIMPLE-IRA is more cost-effective and easier to administer. Employees contact the financial institution directly with any questions.

Breithaupt says 40% of his employees participate by contributing part of their salary. Though health insurance is more of an attraction for potential and existing employees, he says the retirement plan provides an additional incentive by rounding out the firm's benefit package.

SIMPLE-IRA BASICS

  • You can set up a SIMPLE-IRA if your company has 100 or fewer employees and you meet certain other requirements.
  • Eligible employees are those who received at least $5,000 in compensation during any two years preceding the current calendar year and are reasonably expected to receive at least $5,000 during the current calendar year.
  • The employer must complete IRS form 5304-SIMPLE (if employees select the financial institution) or 5305-SIMPLE (if the employer chooses the financial institution).
  • No employer tax filing is required. The employer may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting this plan. See IRS Form 8881.
  • Contributions are made up of salary-reduction contributions and employer contributions. The amount an employee chooses to contribute cannot exceed $10,000 [as of] 2005. Employers can match employee contribution up to 3% of compensation (this can be reduced to as low as 1% in any two out of five years) or a nonelective contribution of 2% of each eligible employee's compensation.
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