SIMPLE IRA - small business

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B_F_Skinner_Box
Posts: 23
Joined: Sun Jul 14, 2019 1:40 pm

SIMPLE IRA - small business

Post by B_F_Skinner_Box » Mon Jan 13, 2020 10:51 am

First of all, apologies if this is in the wrong area - after reading the respective descriptions, "Personal Finance (Not Investing)" seemed most appropriate to me.

So my wife owns a small business (dance company, one owner, one manager, roughly 15 part time dance teachers) - most or all of the teachers earn more than the $5,000 minimum required to offer the 2% match for the company that is required with the SIMPLE

I am not an official owner of this company and contribute to my own 403b for the company I work for. We both cap our personal ROTH IRA's every year.

Information for the SIMPLE IRA can be found on the wiki

https://www.bogleheads.org/wiki/SIMPLE_IRA

and the government's site

https://www.irs.gov/retirement-plans/pl ... e-ira-plan

For those of you that have a small business SIMPLE IRA, I have a few questions for you.

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To use Vanguard with either a whole market or a three fund option, how difficult is this to setup? Has anyone without formal business/tax training administered this for more than 10 employees? or do you all differ the management to your CPA company?

I see Vanguard charges $25 per fund per employee (presumably per year). Would the total cost to the company for starting this be:

(number of employees X number of funds X $25) + (2% X their salary)

Or am I missing some sort of fee

Also - we're dealing with a fair amount of turnover, and college students - if they don't have any preference, do you just have a "default" fund that the 2% goes into?

Basically, are the fund fees and 2% salary the ONLY costs associated with starting a SIMPLE, and is it easy to administer yourself as a non-MBA or accountant. Also I ASSUME this would be in the same bucket as a 401k... meaning you can still contribute to a personal ROTH IRA on top of this.

If any of you have been down this road before, I would appreciate your input. The company we use to do our taxes offered to set this up... but presumably that would add additional costs, and if it's easy I'd prefer to just administer it myself. Am I missing something obvious? and on a scale of easy to complicated, how does this fall in administration.

Thanks in advance!

niceguy7376
Posts: 2516
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: SIMPLE IRA - small business

Post by niceguy7376 » Mon Jan 13, 2020 11:54 am

I dont have VG experience with SIMPLE IRA.
We have ours through Fidelity.
New Employees are sent a PDF to fill out and post to Fido to open their SIMPLE IRA account.
We setup Employees in our payroll system as contributing to their account by $ or % method.
We match all contributing employees with 3% every pay period (month).
Our payroll doesnt have integration with Fido and thus employer needs to login to Fido site once a month (immediately after payroll is run) and enter individual employee contributions and employer match and submit. Money is withdrawn from comp account and deposited into employee accounts.

COST:
To Employers - There might be a one time setup fee (ours was opened in 2005 and we dont remember). No Annual fees
Employees - No fees. Only ER on funds that they can invest in. No restriction on what they can invest in (Whatever Fido sells, they can invest).
Their SIMPLE IRA account can be seen in their individual login where they have any other Fido personal accounts like Trad or Roth IRA/529/HSA etc.

lessismore22
Posts: 9
Joined: Sun Jul 01, 2018 8:02 pm

Re: SIMPLE IRA - small business

Post by lessismore22 » Mon Jan 13, 2020 12:07 pm

I have a SIMPLE for my company through VG. Easy to start, fill out some paperwork, print it, sign it, mail it in. Then you just add employees through their online portal and VG directs them how to choose from their funds. You do not pick the funds for them. I chose to match up to 3% for those who participate, not the flat 2% for everyone.

My payroll company offered to administer it for me, but honestly it takes less than 5 minutes to process the contributions on VG's website twice/month.

Spirit Rider
Posts: 12198
Joined: Fri Mar 02, 2007 2:39 pm

Re: SIMPLE IRA - small business

Post by Spirit Rider » Mon Jan 13, 2020 12:11 pm

First, some points about the SIMPLE IRA:
  • It will interfere with the Backdoor Roth.
  • The Vanguard fee is $25/fund/participant charged to the participant, the employer pays nothing. Still with a three-fund investment portfolio that would be $75/year deducted from the participants account.
  • I think Fidelity is a much better choice for a SIMPLE IRA plan. They has no such fees for their SIMPLE IRA plan. Their index fund expense ratios are <= Vanguard's for comparable funds.
  • The employer does not have any say in the participant selecting any available funds. At both Vanguard and Fidelity, they can select any index funds, ETFs and other individual securities.
  • The employer has a choice of either a 2% non-elective contribution they must give to all employees or a 3% match on employee elective deferrals.
    • With the types of employees you describe many employees may not contribute.
    • No contribution, no match.
    • Your aggregate staff cost may be much lower than 2%.
    • You can reduce that to 1% in two out of every five years including the first two years. When I have helped very small employers set up a SIMPLE IRA, I have suggested 1% the 1st year, 2% the 2nd year and 3% the 3rd and subsequent years.
  • There is a restriction that SIMPLE IRA accounts may not be withdrawn or rolled over until it has been >= 2 years since the first contribution. Before then any withdrawal/rollover will be subject to ordinary income taxes and a 25% excise tax penalty. A rollover with additionally be considered an excess contribution and must be removed with associated earnings.
You really should look at a low cost safe harbor 401k plan such as from Employee Fiduciary. There is a $500 startup cost, $1500 annual administration fee and a 0.08% AUM fee:
  • It will not interfere with the Backdoor Roth.
  • The employee deferral limit is higher, $19,500 (401k) vs. $13,500 (SIMPLE IRA)
  • Safe Harbor contribution requirements are 1% higher. The non-elective contribution is 3% or the employer match is 100% of the first 3% of compensation and 50% of the next 2% of compensation for a maximum match of 4% on 5% of compensation.
  • However, the employee eligibility restrictions can possibly limit the number of eligible employees so the staff costs could be lower. The following restrictions can be elected:
    • Minimum age of 21: Employees < age 21 are not eligible to participate.
    • Minimum length of service and working hours: A minimum length of service of one year can be required. With >= 1,000 work hours/year to be considered one year of service. An additional wrinkle has been added by the Secure Act for 2020. Employees with >= 500 work hours/year in three consecutive years meet the service requirement.
  • If you have younger dance teachers (< age 21), higher turnover with (< 1,000 or < 500) work hours/year. That may limit the number of eligible employees and the resulting staff costs.
Regardless of plan you select, it very likely that you want to use an employer match. With your description of the workforce, studies have shown that on avaerage a significant number of employees will not contribute enough to even get the full employer match

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