September 12, 2011

Reductions in business income may have you contemplating how you can cut back on expenses. If one area you’re eyeing is the contributions your business makes to your SIMPLE IRA plan, remember your plan must follow the rules in order to keep the tax benefits for both your business and your employees.

As an employer, that means no changing horses mid-stream. For a SIMPLE IRA, the amount you choose to contribute during the 60-day election period is the amount you must contribute for the entire year.

That’s not to say you can never change how much your business contributes to the plan. In general, you can make an annual election to reduce your contribution to no lower than 1% of employees’ wages. You can do this for up to two calendar years.

Alternatively, you can switch to non-elective contributions. With this option, you contribute a flat 2% of compensation instead of matching contributions made by your employees.

With either choice, you have to notify employees of the change to your SIMPLE IRA plan before that year’s election period. The election period is usually the 60 days beginning in November and ending December 31. The revision will start January 1 of the following year.

Another caution: Be sure you continue to deposit the funds your employees contribute to their accounts on time — no later than 30 days after the month contributions are withheld from paychecks. You have until the due date of your business tax return (including extensions) to deposit your matching contribution.

For more information about your SIMPLE IRA plan options, please contact us. We’re here to help you make the right choice for your business.