SIMPLE IRA

Submitted by David MAURICE on Wed, 2019-03-13 19:20

My client is a young dentist with 3 employee and has a new SIMPLE IRA plan. He selected 3% structure for his plan. How much total contribution can he make to his own account for 2019 and at what point does he need to consider a 401k or SEP in order to increase his ceiling for maximum contributions?



Submitted by William Tuttle on Wed, 2019-03-13 21:26

The above is the short answer.  Below is the longer but still woefully incomple answer. Just enough to make you dangerous. There are many other pieces to the puzzle.

  • The maximum employee deferral for 2019 to a SIMPLE IRA is $13K + $3K catch-up contribution if he is >= age 50 at anytime in 2019. The 3% employer match is for all employees including him. There is no compensation limit for the employer match.
  • All employer retirement plans have rules to prevent owners from unduly discrimiating against their employees.
  • There is only a non-elective employer contribution to a SEP IRA plan. This can be up to 25% of all compensation up to the 2019 compensation limit of $280K. The 2019 maximum contribution is $56K
  • The maximum employee deferral for 2019 to a 401k is $19K + $6K catch-up contribution if he is >= age 50 at anytime in 2019. The employer contribution must generally be the same percentage for all employees up to the 2019 compensation limit of $280K. The maximum employee + employer annual addition limit for 2019 is $56K
  • Unless the plan is a “safe harbor” 401k plan, His employee deferral could quite likley be limited by antidiscrimination testing. Therefore, if he wants a 401k plan, he should be advised to a adopt a safe harbor 401k plan. This requires either of:
  • A 100% match on the first 3% of compensation + a 50% match on the next 2% of compensation, for a total match of 4% on the first 5% of compensation.
  • A 2% non-elective contribution on all compensation.
  • A safe harbor plan also requires 100% immediate vesting for all contributons and various other notice and aministrative rules.
  • If he really wants to maximize his annual additions, there is a New Comparability Method profit sharing for 401k plans that could allow him to contribute the full employee + employer annual addition limit (2019 = $56K). In this method he could be able to contribute a greater percentage than the other employees, but it is going to cost him.
  • He would need to use a TPA with such an option in the plan document and it would be dependent on the census of those three employees. Typically, it would require an employer non-elective contribution of > 5% for other employees.
  • Note: Typically, SIMPLE IRAs have no administrative fees. A 401k even for such a small employer would cost a minimum of $500 – $1000 in startup fees and a minimum of  $1K – $2K in annual administrative fees, maybe more. The annual cross testing for a New Comparability plan would cost more.
  • Finally, you can only have a SIMPLE IRA in any given calendar year. It would be 1/1/20 before any other plan could be adopted.


    • Submitted by David MAURICE on Wed, 2019-03-13 21:52

    All points well taken, including your opening disclaimer. This is why I submitted my very open ended question on this forum. Thank you exceedingly for putting this all in one place and beginning with your disclaimer.  I know most of these pieces but mostly in isolation which doesn’t work for me. I need to see as many pieces globally as I can hold at once or nothing makes sense. This is the only place I would trust to gather the useful information I need recognizing that it will be added to and challenged by many other nerds like me. Although we’ve been advising on retirement accounts for more than a quarter of a century, almost none of it has been at the qp level. So, being as experienced and knowledgeable as we are on decumulation causes me trepidation in an area we are dramatically lacking. Thank you again! 



    Submitted by William Tuttle on Wed, 2019-03-13 22:02

    Regardless, of your political pursuasion and view on the IRAQ war. Here is an eternal truth from Donald Rumsfield; “as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.” and my addition; “and those are the ones that bite you in the ass.”



    Add new comment

    Log in or register to post comments