The Savings Plan for Your Small Business (or Side Hustle)
I've preached many times on the importance of saving early and saving consistently. One of the main vehicles people use to do that is through their employer retirement plan, such as a 401(k). Larger companies have the time and resources to set something up like a 401(k) plan, but what about small businesses? What if you're a small team with limited dollars and time? How can you do your part in providing an avenue to employees for financial wellness?
One "simple" way to do this (pun intended) is through a retirement plan called a SIMPLE IRA.
You've probably heard of an "IRA" in the context of your personal retirement savings. Well a SIMPLE IRA provides the same tax benefit as a personal IRA, but is structured specifically for small businesses. And best of all, these are extremely easy and affordable to setup! They also require very little "maintenance" each month.
What Small Business Can Setup a SIMPLE IRA?
You can set one up for your business as long as you have no more than 100 employees earning at least $5,000 in the preceding year. You also can't set up a SIMPLE IRA if you already a retirement plan in place. Meaning, you can't have both a SIMPLE IRA and 401(k).
What Employees Can Participate?
Employees earning at least $5,000 in any two previous years and expected to earn at least $5,000 during the current year. This is the maximum restriction an employer can place on eligibility. Meaning, an employer can make the requirement less restrictive (less than $5,000) but not more restrictive.
How Much Can Employees Contribute?
Employees can contribute up to $13,500 per year (as long as that amount is less than the total amount they got paid that year; in other words, they can't contribute more than they got paid in a given year). Employees 50 and older can contribute an additional $3,000 per year, but their maximum contribution at $16,500.
Notice that this is over 2x more than you could contribute to a personal IRA ($6,000 limit; $7,000 for those 50 and older)!
How Much Do I Have to Contribute as the Employer?
This is where the incentive comes in. As the employer, the IRS gives you two options for contributing to each employee's SIMPLE IRA:
Option #1: Match 100% of the employee’s contribution, up to 3% of their compensation. Meaning, if the employee decides to contribute 3% of their salary to the SIMPLE IRA, the employer would also need to contribute an amount equal to 3% of their salary. However, 3% is the maximum you have to contribute. For instance, if the employee decided to contribute 5% of their salary, you would NOT need to also contribute 5%. You, as the employer, only have to match up to 3%. Of course, you can match above and beyond that, if you want to, but you're not required to. The 3% match can be reduced to 1% in two out of every 5 years. The idea here is that if the employer is encountering some financial difficulties, they can temporarily make some cuts to the SIMPLE IRA contributions.
Option #2: Contribute an amount equal to 2% of each employee's salary into their SIMPLE IRA, regardless of whether or not that employee decides to contribute.
Any amount the employee and employer contribute is immediately vested. Meaning, when employees leave, they get to keep their contributions and the employer contributions. Unlike some plans, where the employee has to remain at the company for a certain period of time before they are entitled to the employee contributions.
How Much Does it Cost to Setup?
Fortunately, the cost of setting up and maintaining a SIMPLE IRA is very affordable! In fact, most of the time it's FREE! Each custodian (e.g. Vanguard, Fidelity, Schwab, TDA, etc.) has their own pricing structure, which you can find by simply Googling "SIMPLE IRA [custodian] cost". Some may charge a minimal account maintenance fee per employee, but that's normally pretty cheap (around $25). Also, most of the custodians have NO minimum balances or trading fees.
However, the employee will have to pay annual management fees for the underlying funds they decide to invest in.
What is the Deadline for Setting up the Plan?
You can establish your SIMPLE IRA between January 1st and October 1st. So if you decide on October 2nd, 2021 that you want to establish a SIMPLE IRA for 2021, you'll have to wait until January 1st of 2022 to set it up. However, there is an exception to that (as always when it comes to the IRS). If your business didn't begin until after October 1st, but before January 1st, you can set up the plan as soon as administratively feasible.
How Do I Get Started?
If you've decided that a SIMPLE IRA plan is right for your small business, here is how you can get started…
1) Find a custodian
Here are links to a few of the popular custodians who offer an affordable SIMPLE IRA plan
Vanguard - I've set up a SIMPLE IRA with Vanguard and it was very easy. Customer service was helpful and responsive, and making contributions is very "simple"!
Schwab - I've never set up a SIMPLE IRA with Schwab, but I've never had any major issues setting up other accounts.
TD Ameritrade - TDA has merged with Schwab, but it appears that platforms are being kept separate for now. I've always had a good experience with them. They typically have great customer service.
Fidelity - For what it's worth, I had a terrible experience setting up a SIMPLE IRA a Fidelity. They lost my paperwork (twice) and it was a lot of work to get in in touch with a real person. But that was just my experience.
2) Adopt a SIMPLE IRA Plan Document
You will need to complete IRS Form 5305-SIMPLE. You will not need to file this form with the IRS, but you will need to retain for your records.
3) Follow instructions for online application (using links above)
Normally it requires you to complete a few forms as the employer, obtain signatures from eligible employees, and distribute mandatory disclosures to employees.
4) Ongoing maintenance
You will need to link your business bank account and work with your payroll person to modify the monthly process to include contributions to the SIMPLE IRA. fortunately, most of the custodians make it very easy by providing an online "portal" in which you and your payroll person can manage the plan.
Conclusion
A SIMPLE IRA is just one of the many options for retirement plans, but for small business owners with limited time and resources, it's a great alternative to the expensive, time-consuming, regulation-heavy 401(k) plan. Yet it still provides a vehicle in which you can encourage and incentive financial wellness for your employees!