Any employer with 100 or fewer employees who earned $5,000 or more during the preceding calendar year is eligible to establish a SIMPLE IRA plan. However, an employer that currently sponsors another retirement plan generally cannot sponsor a SIMPLE IRA plan.

In addition, SIMPLE IRA plans can be sponsored by most types of organizations, including C-corporations, S-corporations, partnerships and sole proprietorships. Related employers (businesses under common control, for instance) are treated as a single employer.

Eligible employees can contribute up to $8,000 in 2003 (gradually increasing to $10,000 in 2005) through payroll deductions. Catch-up provisions allow employees 50 and older to make an additional $1,000 contribution in 2003, with the limit increasing $500 each year until reaching $2,500 in 2006.

When employers start these plans, they have two options for the IRAs where the contributions are deposited:

The employer may choose the financial institution that will receive all contributions under the plan. In this case, employees will have the right to transfer contributions to a SIMPLE IRA at another financial institution without cost or penalty.

Each employee may make the initial choice of financial institution to receive contributions. In this case, an employee does not have the right to transfer to another financial institution without cost or penalty.

What are profit-sharing plans or stock bonus plans?

A profit-sharing or stock bonus plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise).The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan or stock bonus plan may include a 401(k) plan.

What are 401(k) plans?

Your employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401(k) plan. You can elect to defer receiving a portion of your salary which is instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes the employer may match your contributions. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount you may elect to defer each year. The dollar limit is $12,000 in 2003 with annual increases in $1,000 increments until the limit reaches $15,000 in 2006. Other limits may apply to the amount that maybe contributed on your behalf. For example, if you are highly compensated, you may be limited depending on the extent to which rank-and-file employees participate in the plan. Your employer must advise you of any limits that may apply to you.