A Savings Incentive Match Plan for Employees plan, better known as a SIMPLE plan, is an IRA-based retirement plan available to employers with fewer than 100 employees.

Under a SIMPLE IRA plan, an employee can contribute a portion of his pay to his SIMPLE IRA account. An employee can make a maximum contribution of $9,000, ($10,500 if age 50 and over), to his SIMPLE IRA account for 2004. You, the employer, are required to make a contribution for every worker who receives $5,000 or more in compensation.

You can match up to 3% of the salary for the employees who contribute to their SIMPLE IRA account. You only have to match for those employees who contribute to the plan. In any 2 years out of a 5 year period, after notification to the employees, you may elect a lower matching contribution percentage but not less than 1% of salary.

Your business also has the option to select a non-elective mandatory company match of 2% of annual salary for every employee. Under the non-elective contribution formula, even if an eligible employee doesnt contribute to his SIMPLE IRA, you must still contribute to his account 2% of his salary.

Advantages of the SIMPLE IRA

• Less expensive than a 401(k)

Disadvantages of the SIMPLE IRA

• A special tax penalty of 25% unique to the SIMPLE IRA for withdrawals made within the first two years of opening a SIMPLE plan. (Congress is considering eliminating this tax).

• A SIMPLE IRA is much less flexible than a 401(k) plan.

• Employer must make contributions for all eligible employees.

• No contributions can be made to other qualified retirement plans.

• All contributions are immediately vested, meaning all contributions belong right away to the employee.

• A SIMPLE IRA plan can only be terminated prospectively, beginning no earlier than the next calendar year. Contributions must continue until the plan is terminated.

• A SIMPLE IRA must be set up at least 60 days prior to year end. Thus, October 1, is the last day to set up a new SIMPLE IRA for the calendar year.

• No loans allowed.

While the SIMPLE IRA make senses under certain circumstances, this plan comes with a lot of strings attached. If your business has no employees and you do not expect to hire employees in the near future, consider using a Solo 401(k) with a loan feature instead of a SIMPLE IRA. And, if you have more than 20 employees, look at setting up a regular 401(k) as an alternative.

To terminate a SIMPLE IRA plan, notify the financial institution that you chose to handle the SIMPLE IRA plan that you will not be making contributions for the next calendar year and that you want to terminate the contract or agreement with it. You must also notify your employees that the SIMPLE IRA plan will be discontinued.