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Is the SIMPLE a viable employer plan for you and your employees?

Certainly, the SIMPLE is the easiest and least costly plan to fund and administer amongst all the other employer-sponsored plan options that a business owner has.

13,500 is your 2020 max annual SIMPLE contribution for yourself, without employing a spouse [It goes to $16,500 if age 50]

To add a traditional IRA when you don’t have a company plan, you currently can do $12,000 for you and your spouse for 2019 (and more in future years if the amount goes above $6000 each) [$7000 when 50 or over]

The reason you can do $6000 annual IRA contribution for your spouse currently is because you qualify for a ‘spousal IRA’ when you don’t have a plan at work. As soon as you get the plan at work (the new SIMPLE), you will likely lose the IRA deduction for both of you because of your income level.

If both of you make the $13,000 SIMPLE, you do increase your total from $12,000 (two personal IRAs and no company plan) to $26,000 (your and spouse’s total under a 2019 SIMPLE), but there is a new cost to that in addition to whatever your employee pension cost is. That’s the federal payroll tax that your spouse and your corp will pay on the $13,000, plus any state employment or unemployment costs. The federal payroll tax cost is about 14%, or $1750. Add that to any state payroll tax; not sure how much that is, depends on your state.

At a 35% marginal tax rate, you will defer taxable income of $16,000, which would defer about $5,000 in tax annually. Therefore, you pay $1750-$2000 in payroll tax now, to defer taxation to later, deferring $5000 of tax. The choice for you is whether that is worth it. To me, I would not likely pay tax now for a tax deferral on income that I will still have to pay tax on later, and moreso because the later tax might be at an even higher tax bracket (it certainly isn’t likely to be lower).

[Note: Unfortunately, that is the naked truth about pension plans.]

Finally, with a company SIMPLE, you could still do an IRA but it would be non-deductible. On the tax return form 8606 would keep track of the IRA, that it has a basis, so that upon distribution at some future retirement date, it would not be taxable, except for the income earned by those funds. Over time, often taxpayers lose track of this unfortunately. The 1099 you get at that time would not indicate that the distribution is partially taxable or not.

The other cost to you for the SIMPLE is the matching contributions to your employees – which is maxed at 3% of wages but limited to the amount the employee defers. For example, an employee earning $25,000 could cost you $750 in matching contributions (3% of $25K) – but if the employee only made, say $600, of elective contributions the entire year, then your matching obligation would be limited to that $600 – in other words, your obligation is the lesser of the two. This is significantly less than a 401k obligation.

Another key factor: Unlike the 401k which limits the owner’s contributions based on employee participation, the SIMPLE has no such owne contribution limitations.

The SIMPLE does not require annual fees nor annual reporting, like the 401k, so the administration of it is much simpler and less costly

All in all, it is a fact that it is very common among smaller businesses, the most economical, generally provides for a good annual amount of retirement funding for the owner, and it gives the employee a way to put money away as well.

Scott Turner CPA

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