Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

January 24, 2014

One commonly used retirement plan by small business owners is a SIMPLE IRA plan.  SIMPLE IRA is simply an acronym for “Savings Incentive Match Plan for Employees Individual Retirement Account.”  The plan is, well, fairly simple to set up and operate as well.  You simply fill out the simple SIMPLE form by October 1 and find a custodian such as Vanguard, Schwab, Fidelity, or others to handle the money and you are in business.

There are generally no costs or nominal costs to setup and operate the plan, depending on the custodian and amounts invested, and there are no required annual plan filings with the government.  This has made them appealing for many small companies with employees compared to a 401(k).  For 2013, participants can defer up to $12,000 of their earned wages plus another $2,500 catch-up contribution if over age 50.

The employer also agrees to make a three percent maximum matching contribution.  For example, if the employee defers nothing into the plan from his or her salary, then the employer has no match requirement.  If the employee defers two percent, the employer has to contribute two percent.  If the employee defers three percent, then the employer has to match three percent.  If the employee defers more than three percent, the employer still only has to contribute three percent. (The employer also has the option to select a two percent nonelective contribution in lieu of the three percent match.  This means the employer contributes two percent whether or not the employees contribute anything.)

The employer match portion is in addition to the $12,000 salary deferral and possible $2,500 catch-up contribution.  The three percent match also has a salary cap of $255,000.  So the maximum employer match is $7,650.  I know what most of you are thinking right now…”Gee, that means I will only get a match on the first third of my salary. What a rotten deal!”  Ha!  If you have one of those jobs paying over $750,000 a year, your company is in the wrong plan!

The employer has to remit the employee’s salary deferral portion to the SIMPLE custodian as soon as reasonably can be done, but  in any case no later than thirty days after the end of the month in which the employee’s paycheck was dated.  If the deferral is sent to the custodian within seven days of the paycheck date, it is a safe harbor and will always be considered timely deposited.  The employer match portion, however, can be paid as late as the tax return due date for the employer, including extensions.

So how does it work with the business owner and his or her deferrals?  What about the match?  If the business is setup as an entity such as a corporation and the owner receives a paycheck like any other employee, then the same rules apply that apply to the other employees.

If the owner is self-employed however, such as a sole proprietorship, the net earning for the entire year are considered earned/paid on the last day of the year, and the owner must remit the salary deferral portion to the custodian by January 30th (30 days after month end) of the following year.  So 2013 salary deferrals for a self-employed individual are due in six days.  (This includes the $12,000 plus the $2,500 catch-up if applicable.)

The three percent match is not due until the tax return due date for the owner (generally April 15), including any extensions filed (generally October 15).  The employer match of three percent for the owner is calculated based on the amount of Schedule SE, section A, line 4, or Section B, line 6, before subtracting any contributions to the plan for the owner.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.