Form 5304-SIMPLE and 5305-SIMPLE setup variants of the IRS approved SIMPLE retirement plan. The difference? Form 5305 SIMPLE requires a designated financial institution and Form 5304-SIMPLE doesn’t. SIMPLE plans are for companies with a simple business structure e.g. Single Member LLCs and Sole Proprietorships that use IRS Schedule C as their annual IRS tax return. I’ll present a list of pros and cons of SIMPLE plans.
Hi, I’m Gary Bode, a CPA with a virtual office to help you with Schedule C regardless of where you live. I understand Schedule C companies start off small. This post is meant for companies without a CPA. Why am I posting it then? I’ve seen Single Member LLCs miss out on pension plan advantages, especially the startup tax credit available on Form 8881.
Form 8881
- File IRS Form 8881 to claim a tax credit for establishing a SIMPLE retirement plan.
- Form 8881 calculates the Credit for Small Employer Pension Plan Startup Costs, This credit can be up to $500 per year for the first three years of a SIMPLE plan.
- A tax credit is better than a deduction. A $500 tax credit saves you $500 in taxes. A $500 tax deduction saves perhaps $150 in taxes ($500 x your marginal tax rate).
Don’t miss put out on the Form 8881 incentive just because you don’t have a CPA.
SIMPLE Information
Here a past post that gives a nice 2013 SIMPLE example. SIMPLE plan contributions are not taxed in the year you make them, they’re tax deductions. So a $1000 SIMPLE contribution in 2013 might save you $300 of current income tax. But it still costs you $700 of cash flow. And because of timing, you may have to front the entire $1000 for some period of time.
The Two IRS SIMPLE Qualifying Criteria
- Fewer than 100 employees.
- No other company pension plan.
“The main factor for selecting the type of company pension? Personal goals of the owners, shareholders, Members or Partners. Don’t assume a SIMPLE plan is best for you. Lots of issues factor into the decision(s) of when to establish a pension plan and what kind of plan to establish.”
- Gary Bode, Form 8881 CPA
Advantages of SIMPLE plans
- Easy setup. Just download Form 5304-SIMPLE or Form 5305-SIMPLE from the IRS website.
- Credit for Small Employer Pension Plan Startup Costs: IRS Form 8881 allows up to a $500 tax credit, per year, for the first three years of a SIMPLE plan.
- Few administrative fees, per se.
- For a Schedule C Company, no formal payroll process is required. Sometimes this is the main consideration.
- For a Schedule C business, both the owner and company can make SIMPLE contributions. The company component is a legitimate tax deduction.
- They offer tax deferred savings.
Disadvantages of SIMPLE Plans
- They can be too simple. Some companies use them because they’re easy to implement, even when a SIMPLE plan isn’t the best solution.
- SIMPLE contributions require good cash flow. This is a major consideration in any small company.
- In my experience as a CPA, most small employers want to maximize their own pension contributions while limiting other employee’s benefits. But employees vest immediately with SIMPLE plans. Other retirment plans vest employees in 3-5 years, so, the company gets back its pension contributions for employees that don’t stay around that long.
- SIMPLE allows only one pension plan for your company. Having multiple pension plans can help the owners or Members maximize their pension benefits and still limit other employee’s pension benefits.
- SIMPLE plans don’t allow much self adminstration. A big issue in 2013 is broker transaction fees eating away at the tax deferral benefits of a pension plan.
- There’s still administrative compliance with a SIMPLE plan. Just make sure you follow all the IRS directives.
Leave a Reply