Retirement Savings can be SIMPLE

Published September 7, 2006

Do you have a 401K type plan where you work? If not, you may want to talk to your boss about setting one up as early as some time this month. Only if it is set up by October 1st, will it do you any good for this year.

401K type plans let you deduct funds from your paycheck, before taxes, so that they can be contributed directly into a retirement account. Due to the complexity of setting up and administering such plans, which go by various names, many employers have avoided them. Not jumping in has meant that both employees and owners miss out, since such plans generally cover everyone in the company the same way.

The most recent of these types of plans to make an appearance is called the SIMPLE plan. It was designed for small employers to be inexpensive and uncomplicated to administer. Once installed, all or none of the eligible employees can participate. That means if you own a small business, you could set aside money even if none of your employees choose to join in.

The amounts that can be invested into a SIMPLE are the lowest of all the voluntary plans, topping out at $10,000 a year or $12,000 if you are over fifty. However, there is a key difference. Unlike many other plans, a SIMPLE plan allows you to pay in the maximum even if your gross pay is low. An owner could, in fact, place a spouse or other family member on the payroll and have them invest the maximum into their SIMPLE account without increasing their taxable income very much. This feature means that even a small proprietorship should consider the SIMPLE as a possible way to “max out” their retirement contributions .

If you operate your business as an S Corporation, a SIMPLE may be especially appealing. Here is why: Like many S Corporation owners, you may be holding down your gross pay in order to minimize paying payroll taxes. However, even with a low gross pay, you can still punch in the maximum into your SIMPLE plan.

There is a cost for setting up a SIMPLE plan. Generally, the employer will need to “match” up to 3% of each employee’s pay if they invest at least this much in a particular year. For example, if an employee earning $50,000 per year and invests 3% ($1,500) during the year, the employer will need to match the same amount. However, this is the maximum amount even if the employee invests at a higher level.

The incentive that this “match” provides may be enough to nudge your employees into participating. Since you do not need to make this benefit available for recent hires, it could be a great way for you to reward those who have been with you for awhile.

If your employer is offering a plan like this and you are not participating, you should start immediately. Having a little bit of money going into a retirement plan on an on-going is easy to get used to if it comes out of your paycheck. More importantly, if your employer is matching some or all that you could put in, you may be leaving money on the table.

If you are an employer who is considering getting into this, don’t lose sight of the October 1st deadline. It is right around the corner.