The IRS Simple IRA Adoption Agreement: What You Need to Know
If you`re a small business owner looking for an affordable and low-maintenance retirement plan for you and your employees, you may want to consider a Simple IRA (Individual Retirement Account). It`s a tax-deferred retirement savings plan that allows you and your employees to contribute a portion of your salaries into the account, and the funds grow tax-free until you withdraw them in retirement.
To get started with a Simple IRA, you`ll need to complete and sign an IRS Simple IRA Adoption Agreement. This agreement establishes the terms of your Simple IRA plan, such as the eligibility requirements, contribution limits, and vesting schedules. Here`s what you need to know about this agreement:
Eligibility Requirements
To be eligible for a Simple IRA, you must have 100 or fewer employees who earned at least $5,000 in compensation from your business in the preceding year. You may exclude employees who are under 21, have worked less than two years, or are covered by a collective bargaining agreement. However, you must offer the plan to all eligible employees who have worked at least 1,000 hours during any previous year.
Contribution Limits
In a Simple IRA plan, both you and your employees can contribute to the account. For 2021, the contribution limit is $13,500, and if you`re over 50, you can make an additional catch-up contribution of $3,000. As an employer, you must choose between two contribution options:
– Non-elective contributions: You must contribute 2% of each employee`s compensation, even if they don`t contribute to the plan themselves.
– Matching contributions: You may choose to match your employees` contributions dollar-for-dollar up to 3% of their compensation.
Vesting Schedules
Vesting refers to the ownership of the funds in the Simple IRA account. Your contributions are always 100% vested, but your employees` contributions may be subject to a vesting schedule. This means that if an employee leaves your business before they are fully vested in their contributions, they may forfeit a portion of the funds. The IRS allows two vesting schedules:
– Three-year schedule: Employees are 100% vested after three years of service.
– Immediate vesting: Employees are 100% vested from day one.
Completing the Agreement
To complete the IRS Simple IRA Adoption Agreement, you`ll need to provide some basic information about your business, such as your name, address, and tax identification number. You`ll also need to specify the contribution option you`ve chosen and the vesting schedule you`ll use. Finally, you`ll need to sign and date the agreement, along with any other plan administrators or trustees.
Once you`ve completed the agreement, you can establish a Simple IRA account with a financial institution that offers these plans. You`ll need to provide your employees with information about the plan, including the contribution options, vesting schedule, and investment options. You`ll also need to keep careful records of the contributions and distributions made to the plan, and file an annual report with the IRS.
In conclusion, a Simple IRA can be an attractive retirement savings plan for small businesses, offering tax advantages, flexibility, and low administrative costs. By completing the IRS Simple IRA Adoption Agreement and choosing the right options for your business, you can provide your employees with a valuable benefit and help secure your own retirement future.
