Offering employees a retirement plan not only gives staff extra incentive, but it also gives employers an additional deduction at tax time. Employer contributions are deductible on your federal income tax return to the extent that the contributions do not exceed limitations described in section 404 of the Internal Revenue Code. A new retirement plan for businesses with 100 or fewer employees called the SIMPLE (Savings Incentive Match Plan for Employees) might work best for your retail bakery.
Employers must make matching or fixed contributions (even in years when the business has no profits) in accordance with the following formula:
An employer is required to match an employee’s elective contribution on a dollar-for-dollar basis, up to a maximum of 3% of an employee’s compensation.
The maximum employer contributions are different for SIMPLE-IRA and SIMPLE-401(k) plans.
For SIMPLE-IRA, maximum employer contribution under the match formula is $6,000.
For SIMPLE-401(k), maximum employer contribution under the match formula is $3,200.
LOOPHOLE — SIMPLE-IRA type plans allow an option to drop contributions to as low as 1% of compensation in up to two years in any five-year period. This option is not available in 401(k) type SIMPLE plans.
In lieu of matching employees’ contributions, you can make a fixed contribution of 2% of the compensation of each eligible employee (regardless of whether they put any of their own money in the plan). Under the fixed contribution formula, the maximum compensation per employee is limited to $160,000, under both SIMPLE-IRA and SIMPLE-401(k) plans, for an employee to no more than $3,200 per year.
Tax treatment of SIMPLE accounts
Employee and employer contributions to a SIMPLE account are excluded from the employee’s income and not subject to income tax withholding. However, the employee’s (but not the employer’s) contributions are subject to Social Security tax.
The employer’s matching (or fixed) contributions are deductible as long as they are contributed to the employee’s SIMPLE account by the due date for the employer’s tax return. Employers must deposit the employees’ elective contributions to the SIMPLE account within 30 days after the end of the month in which they are deducted from the employees’ pay.
The most important features of SIMPLE plans are as follows:
Non-discrimination rules that apply to other retirement plans do not apply to SIMPLE plans.
There’s no requirement that a minimum number of employees elect to participate. Thus, the plan can be set up and an employer can make contributions, even if no employees choose to participate.
Self-employed persons can participate in a SIMPLE plan.
There are simplified reporting requirements.
Contributions must be fully vested immediately.
Contributions are mandatory despite fluctuations in profits.
Employees may make elective contributions expressed as a percentage of compensation and not as a fixed dollar amount, up to a maximum of $6,000 per year.
All employees earning at least $5,000 per year must be eligible to participate in the plan.