About the Simple IRA: Employer Side
What about the employer side? From the employer’s perspective, this type of IRA is the most cost-effective option if the employer has 100 employees or less. However, there are restrictions the employer must consider before they commit to this option.
The most important consideration is the way employer contributions are determined. The employer actually has two options: They can match employee contributions up to 3% of the employee’s salaries or they can elect to make a standard non-elective contribution of 2%. If the employer chooses the latter option, they must make that 2% contribution on behalf of all QUALIFIED employees regardless of whether the employee chooses to make contributions on their own behalf or not.
There’s one other very important restriction for the employer to consider. Should they elect to initiate this type of retirement savings plan for their employees, they cannot elect out of making contributions for any reason. That’s vastly different than a 401K plan where the employer can actually change their contribution percentages or completely elect out on a year-by-year basis. On matching contributions, they can adjust the matching contribution percentage each calendar year but never lower than 1% of the employee’s salaries.