For companies with fewer than 100 employees, choosing to adopt a SIMPLE IRA program makes a lot of sense. Essentially no cost to adopt or maintain, participants get to choose their own investment strategy, and a maximum expense to the company (ahem, “benefit to the employee”) of only 3% of compensation, no annual disclosures to participants or the IRS; what’s there not to like?
While the primary reasons plan sponsors tend to prefer a SIMPLE are the ease of setup and that inexpensive 3% company benefit, the administration of a SIMPLE plan is also no small chore and mirrors almost exactly what is required of 401(k) plan sponsors. It’s for this reason that the lack of service providers can become a challenge since there are few resources for administrators to reach out to if they have questions or to proactively contact them to convey important details in the process that they weren’t aware of. One example is deposit timing: The same requirement that deferral contributions are funded seven business days from the paycheck cut date applies to SIMPLEs as it does 401(k) and 403(b) plans. How is this even corrected? (Pro tip: Call BRI!) Another example is retaining proof the plan was offered on time to eligible employees: If an employee was offered the SIMPLE plan when they were supposed to but forgot (or worse, intentionally) went to the DOL and told them the plan was never offered to them and they’re now owed remuneration from the company, would you be able to prove otherwise? What if you forgot and just realized you should have offered the plan to an employee? BRI can help you with that, too, if you’re interested.
The bottom line is that, yes, 401(k) plans are more complicated and expensive so is it worth it to make the jump to a qualified plan? Here are some improvements that can be made to your retirement program if you’re considering doing so:
- Company benefits to anyone covered by the plan can increase from $9,900 to $66,000 (666%! Indexed for 2023)
- Salary deferral contributions can increase from $15,500 to $22,000, catch-up contributions for those over 50 from an additional $3,500 to $7,500 (indexed for 2023)
- Company benefits aren’t necessarily earned by the employee until they’ve worked there for up to six years (i.e., can incorporate the use of a “vesting” schedule)
- Company benefits can be discretionary from year to year and come as either a match of participant deferral contributions, as a non-elective/profit sharing contribution or both
- New participants are able to join the plan more than once per year
- Access to retirement funds can include a number of layers and restrictions to prevent employees from depleting their account without authorization
- Access to Roth and/or after-tax contributions
- The option to restrict access to investments available in the plan in order to ensure participants can only invest in funds that are being regularly monitored for good performance (helps reduce the fiduciary responsibility of plan sponsors)
- Access to multiple service providers who have made it their profession to answer your questions, ensure your plan is operating smoothly, and make you aware of options you may not have considered or come from brand new legislation (there seems to be a lot of that these days!)
Believe it or not, despite all the reasons listed above, BRI likes a good SIMPLE when it makes sense! In general, the immediately-vested, freely-accessed, somewhat-muted benefit provided by a SIMPLE IRA is a solid choice compared to, say, a safe harbor match 401(k) plan as long as the owners of the company and their most important employees agree that the deferral limit is good enough at the moment and the company would prefer to provide benefits in other ways rather than increase the retirement plan benefit from 3%. Now, if you ask any financial advisor which they prefer you’d be hard-pressed to find one that prefers a SIMPLE over a 401(k) simply due to how much easier it is to provide guidance and education to 401(k) plan participants. Just imagine reviewing 35 proven options versus considering tens of thousands of stocks, bonds, ETFs, and mutual funds!
So how does one transition away from a SIMPLE IRA? First step: Notify all employees currently eligible for the plan as well as the IRA trust custodian(s) that the SIMPLE program will be discontinued. This notification must be received by the employee 60 days in advance of the intended termination date. One rule of SIMPLE programs is that it must be in place for the whole year. This means that if you’d like to stop sponsoring your plan, your participants must be notified by November 2nd in order to avoid committing to the plan for another year! Starting in 2024, SIMPLE IRAs are able to transition into a safe harbor 401(k) plan mid-year (likely with similar notification requirements but the IRS has not confirmed this point), but if your company is located in a state which does not require you maintain a retirement plan then you’d be stuck if you missed this deadline. If you’re looking for more guidance regarding your SIMPLE IRA plan, including what’s required to terminate it, here’s a link to an FAQ page the IRS put together for you.
Interested in digging into how your current plan might be improved with BRI’s decades of experience? Please contact us for a complimentary plan comparison!