It’s not news that far too many people approaching retirement haven’t saved enough. Many of them say they plan on working full-time beyond normal retirement age and part-time after they retire. But the reality is that those plans are often derailed by illness or other changes in circumstance, so that a much smaller percentage of people who intend to work in retirement are actually able to.

For some people, beginning to participate in or to increase current contributions to, an employer’s 401(k) plan may help. But other people work for small businesses or employers who don’t offer any type of retirement plan–because these plans are often too expensive, complex, and complicated for a small business to handle.

Enter the SIMPLE individual retirement account. The SIMPLE part of the plan moniker refers to Savings Incentive Match Plan for Employees. Under a SIMPLE IRA, employees and employers make contributions to traditional IRAs, subject to certain limits.

This is an excellent start-up retirement savings plan for small employers who do not currently sponsor a retirement plan. Self-employed individuals are also eligible to start a SIMPLE IRA. Financial advisors can perform a valuable service for small business or self-employed clients by making them aware of these plans.

Advantages. For the small business owner or employer, having a SIMPLE IRA helps attract potential employees who may be reluctant to take a position with a company that has no retirement plan.

From the descriptions above, it is easy to see that other advantages to the employer include: the SIMPLE IRA is easy to set up and run–requiring only a phone call to a financial institution to get things started, it has low administrative costs, and employer contributions are tax deductible.

Employees who contribute to a SIMPLE IRA do so on a tax-deferred basis, through convenient payroll deduction. This advantage, plus allowing a much higher contribution, makes the SIMPLE IRA preferable to a traditional or Roth IRA. Each employee is always 100% vested in (or has ownership of) all money in the SIMPLE IRA, an advantage over other types of employer-sponsored retirement plans that require a vesting period for employer contributions.

Establishing a SIMPLE IRA Plan. To start a SIMPLE IRA, the employer or small business with 100 or fewer employees and no other type of retirement plan contacts an eligible financial institution and completes a few Internal Revenue Service forms.

Choosing a financial institution to maintain employees’ SIMPLE IRAs is one of the most important decisions the employer has to make, since that entity becomes a trustee to the plan. (The employer can also decide to let employees choose the financial institution that will receive their contributions.) Regardless of who makes the choice, trustees agree to receive and invest contributions and annually provide the employer with a summary description of the plan features.

Only banks, mutual funds, insurance companies that issue annuity contracts and certain other financial institutions that have been approved by the IRS can be designated as SIMPLE IRA plan trustees. Many of these institutions already have a pre-approved SIMPLE IRA form the employer can review. Helping the small business client choose the institution is another service that a financial advisor can perform.

SIMPLE Plan Requirements. The employer or small business owner who establishes a SIMPLE IRA plan must contribute to the plan, while employees may contribute. The employer makes either a contribution matching employee contributions dollar-for-dollar up to 3% of pay or a 2% nonelective contribution for each eligible employee. The “nonelective” contribution formula requires the employer to contribute an amount equal to 2% of employee’s salary, even if an eligible employee doesn’t contribute to the plan.

Employees are allowed to contribute up to $10,500 in 2007 and 2008. If age 50 or over, the employee can also make a “catch-up” contribution of $2,500 for the 2 years.

An employer generally has no paperwork to file with the IRS. The annual reporting required for qualified plans (Form 5500 series) is not required for SIMPLE IRA plans. The financial institution that holds the SIMPLE IRAs for the plan handles most of the other paperwork.

Another way financial advisors can help small business clients is by providing them with additional information (available from the IRS) and by establishing relationships with institutions that can be trustees for the clients’ SIMPLE IRA plans.

Kristen Falk, FLMI, AAPA, ACS, AIAA, AIRC, ARA, is a senior writer with LOMA in Atlanta, GA. Her e-mail address is falk@loma.org.