Employer Contributions to IRAs

Your employees should be grateful you provide a pension, but they like to see consistency and security in your payments

by Karen E. Klein

My company has been contributing 3% annually toward our employees' SIMPLE IRA retirement accounts. For the 2007 tax year, we filed for an extension on our income tax and my accountant said we did not have to make the IRA contributions, as they are not "due" until we file our company return. My employees are now complaining that I should have made the usual employee contributions in February instead of delaying until filing the company taxes. Am I in the wrong?

—F.K., Brookhaven, N.Y.

A SIMPLE (Savings Incentive Match Plan for Employees) IRA lives up to its acronym: It's one of the simplest forms of employer-sponsored retirement plans. It's an easy-to-administer and economical alternative to a 401(k) plan for small businesses with fewer than 100 employees, says Christopher Acheson, a financial representative of New England Financial in Uniondale, N.Y.

"Employees of small business owners tend to like SIMPLE IRAs because they receive a matching contribution from the business as long as they themselves make contributions," Acheson says.

Your accountant's advice was accurate. "There is nothing in the law that I could locate that requires an employer to deposit funds by the Feb. 15 for the benefit of employees for the prior year," says Donald Lucove, a CPA with Lucove, Say & Co. in Calabasas, Calif. The law requires that matching contributions and non-elective contributions be deposited to each participant's SIMPLE IRA by the employer's tax-filing due date, plus extensions.

Is the Perk Paying Off?

On one hand, your employees should be grateful to be offered a pension, something many small companies do not give their workers. "There is nothing in the law that requires an employer to offer a SIMPLE plan. Your employees have a great benefit that their peers may not," Lucove notes.

However, it sounds as if this perk you've provided is not paying off in terms of employee morale—at least not this year. And that may be due to the particular circumstances your employees are coping with in 2008. "With consumer confidence at an all-time low, gas prices sky-high, the stock market jumping around, and job losses increasing, your employees' complaints about the contribution may be about the money, but might also be about consistency and security of the payments," Acheson says.

Good communication is a key tool for employers who want to forge strong bonds with their employees. Schedule annual enrollment and educational meetings for your employees about their SIMPLE IRA and talk over situations like the one you're facing now. Getting the news out to everyone at the same time will help squelch rumors and long-festering complaints. "The IRS mandates that all employees review Form 5304-Simple prior to Nov. 2 every year, so you might as well do it in a group setting," Acheson says. "Also, if you haven't, hang up the 'summary plan description' in the coffee room for everyone to see and read."

Make Your Contributions Consistent

He suggests you make your employer matching contributions monthly, rather than in one annual lump sum. That way, you won't have to write one large check every year and your employees' accounts could be invested using dollar-cost averaging, a preferred method of long-term investing.

If you can't swing a monthly contribution, try to be consistent with your annual contribution and make it in February even in the years when you are filing an extension on your tax return. "Consistency and timeliness of the contributions can be important signs to your employees of a successful business. Having security and consistency in business practices like this contribution may help bolster employee production and job satisfaction," Acheson says.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.