2013 IRS Form 5304-SIMPLE and IRS Form 5305-SIMPLE discussed by Schedule C CPA | Schedule C Retirement Plan

IRS Form 5304-SIMPLE: Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) — Not for Use With a Designated Financial Institution

IRS Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) — for Use With a Designated Financial Institution.

Schedule C CPAs say SIMPLE is misleading. SIMPLE is just another variant of IRS approved retirement plans, analogous to SEPs, Keoghs and 401(k)s. Here’s a link to our previous SIMPLE retirement plan post.

Which retirement plan is best for your Schedule C business?

It depends. The US government encourages employers to offer a retirement savings program to their employees through IRS administered tax incentives. Points to consider when selecting a plan:

• What will maximize the owner’s pension fund? Looking out for number one is important. Be aware that SIMPLE plans have limited employee discrimination options. So you might have to contribute more to employee’s than other retirement plans.
• What does the IRS allow to maximize tax benefits? SIMPLE plans are for companies with simple structures, like sole proprietorships (Schedule C) or Single Member LLCs. SIMPLE plans are explicitly allowed in the IRS Regulations for self-employed (Schedule C) companies, where the employer and employee are the same, e.g. no other employees.

Whatever you chose, understand all the IRS requirements.

An Overview of SIMPLE

• Lots of IRS requirements and/or options exist for the employer’s contribution. Best to understand them before proceeding.
• If SIMPLE is your best option, choose a financial institution to set up your SIMPLE IRA plan.
• Enroll your employees.
• If you allow employees to select their financial institution, fill out Form 5304-SIMPLE.
• If you require all contributions under the SIMPLE IRA plan be initially deposited with a designated financial institution, fill out Form 5305-SIMPLE.
• Start salary reduction employee contributions. These are held in trust for the employee until you deposit them. Sometimes Schedule C companies forget this, usually because of cash flow issues. There could be IRS and criminal ramifications.
• Determine the company’s contributions.
• Deposit contributions timely. There are multiple employer obligations for SIMPLE plans. Be sure to understand them all. There’s nothing like a gesture of good will coming back to bite you.
• Tell your employees about their rights under the plan. With a SIMPLE plan, the employee owns an account which is similar to an IRA account.
• One drawback - SIMPLE accounts allow less self-direction of their investment than other retirement plans.
• If your Schedule C company has no employees, you can contribute to a SIMPLE plan without a formalized payroll process. This saves payroll administration costs and stress.
• Monitor your trustee. Have your CPA should reconcile the company’s records against the Trustee’s reports.

The Two Tiered Contribution Process

Both the employee and employer can contribute to the employee’s SIMPLE account. This can be the same person with a SIMPLE plan. And that’s common with Schedule C companies.

The first part - Elective SIMPLE deferrals, from the employee

These are voluntary deductions from their payroll or self employment income. The company holds these contributions in trust and eventually deposits them into the employee’s SIMPLE account. The annual limit on employee contributions is $11,500 for 2012 ($12,000 in 2013). An additional $2,500 of catch-up contribution is allowed for employees over 50 years of age.

The second part - SIMPLE” Matching” employer contributions

The employer “matches” up to 3% of the employee’s salary or self-employment income, up to the employee’s contribution. The maximum employer contribution allowed in 2013 is $12,000. It could be $14,500 if the employee is over 50 years old. But the required salary or self-employed income would be $483,333, so most folks never get the maximum employer contribution. Read up on the SIMPLE regulations about non elective contributions and matching issues.

Let’s look at an example:

Our example company is Gary’s Widgets.

• It files Schedule C as part of the IRS Form 1040.
• The company has no employees.
• In 2013 Gary receives no formal wages from the company.
• Gary is more than 50 years old.
• The 2013 Schedule C’s bottom line is $100,000, which is the company’s revenue less IRS allowed expenses.
• Gary has no other pension plans besides this SIMPLE.
• Gary’s Widget’s matches 3% of Gary’s contributions.

In 2013, the allowable SIMPLE contributions are:

• $12,000 from Gary.
• $2,500 from Gary as a catch up contribution since he’s more than 50 years old.
• $435 from Gary’s Widget’s.

IRS Documentation of SIMPLE Plans

• Publication 4334, SIMPLE IRA Plans for Small Businesses.
• Payroll Deduction IRAs for Small Businesses, Publication 4587, describes an arrangement that is an easy way for businesses to give employees an opportunity to save for retirement.
• Publication 4405, Have You Had Your Check-Up This Year? for SIMPLE IRAs, SEPs, and Similar Retirement Plans.
• The IRS Retirement Plans Navigator, encourages small business owners to choose the right retirement plan for their business with resources on maintaining plans and correcting plan errors.

Pluses and Minuses of an IRS SIMPLE Plan

Employers generally want to contribute as possible to themselves, and not contribute as much for their other employees.

• IRS SIMPLE plans have limited employee discrimination options.
• Employees are fully vested on both contributions immediately. Other plans can vest employees after they work for you awhile. Employees who leave early lose some of the employer retirement plan contributions, which then revert back to the company.
• With SIMPLE, no other retirement plan can be in place for the company.
• Self-direction of the SIMPLE account’s investments are more limited than with other plans.
• SIMPLE plans have the standard 10% early withdrawal penalty, but this increases to 25% the first two years. Ouch!
• The accounting for IRS SIMPLE plans is, well, simple. The IRS requires an annual Form 5500, but your CPA or the institution holding the account generally provides this.

We’re a CPA firm with lots of Schedule C clients. We have a virtual office, so distance is not an issue for offering excellent CPA service. After you read a few posts, call for a free initial phone consult at (910) 399-2705.

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Here’s an IRS Summary for SIMPLE as they present it.

Retirement Topics - SIMPLE IRA Contribution Limits

SIMPLE IRA contributions include:

1. salary reduction contributions and

2. employer contributions: a. matching contributions or b. nonelective contributions.

No other contributions can be made to a SIMPLE IRA plan.

• Salary reduction contributions. The amount the employee contributes to a SIMPLE IRA cannot exceed $11,500 for 2010 and 2011. If an employee participates in any other employer plan during the year and has elective salary reductions under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $16,500 for 2010 and 2011.
• Catch-up contributions. If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans for 2010 and 2011 is $2,500.
• Employer matching contributions. The employer is generally required to match each employee’s salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation. This requirement does not apply if the employer makes nonelective contributions instead.
• Lower percentage. An employer may choose to make a matching contribution less than 3%, but it must be at least 1% and for no more than 2 out of 5 years. See Notice 98-4 for more information. The employer must notify the employees of the lower match within a reasonable period before the 60-day election period for the calendar year.
• Nonelective contributions. Instead of matching contributions, an employer can choose to make nonelective contributions of 2% of each eligible employee’s compensation. If the employer makes this choice, they must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. An employee’s compensation up to $245,000 (for 2010 and 2011) is taken into account to figure the contribution limit. If the employer chooses this 2% contribution formula, they must notify the employees within a reasonable period before the 60-day election period for the calendar year.
• Time limits for contributing funds. Employers must deposit employees’ salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the employee would have received them in cash. They must make matching contributions or non-elective contributions by the due date (including extensions) of their federal income tax return for the year.

IRS Form 5304-SIMPLE and IRS Form 5305-SIMPLE