SIMPLE IRA Account
Generally, if your company had 100 or fewer employees who received at least $5,000 in compensation last year, and it doesn’t set up another qualified retirement plan, it can set up a Savings Incentive Match Plan for Employees (SIMPLE). Under a SIMPLE plan, eligible employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular, taxable pay. In addition, the company will contribute matching or non-elective contributions. The company’s contributions to a SIMPLE IRA will not affect the amount employees can contribute to their Roth IRA or Traditional IRA.
Any employee who met the compensation requirement during any 2 years proceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. The term “employee” includes a self-employed individual who received earned income, including leased employees.
Open a SIMPLE IRA Account
You choose whether employees’ SIMPLE IRAs are opened at a single financial institution you name or they are allowed to select their own institutions. SIMPLE IRAs are the individual retirement accounts into which the contributions are deposited and must be set up for each eligible employee.
If you adopt a SIMPLE plan, you must notify each employee of the following information before the beginning of the period for choosing to participate:
- The employee’s opportunity to make or change a salary reduction choice under the plan
- Your decision to make either matching or non-elective contributions
- A summary description provided by the financial institution
- Written notice that his or her balance can be transferred without cost or penalty to a qualified financial institution of their choice
Contributions are made up of salary reduction contributions and employer contributions. The employer must make either matching contributions or non-elective contributions. No other contributions can be made to the SIMPLE IRA plan. All contributions can be deducted from current income.
A SIMPLE IRA plan can permit participants who are age 50 or over to make catch-up contributions.
Employer Matching Contributions
You are generally required to match each employee’s salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation. This requirement does not apply if you make non-elective contributions as discussed later.
Instead of matching contributions, you can choose to make non-elective contributions to each eligible employee equal to 2% of their compensation for the year. You must make non-elective contributions whether or not the employee chooses to make salary reduction contributions, and you must notify the employees within a reasonable period of time before the 60-day election period.
You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. You must make matching contributions or non-elective contributions by the due date (including extensions) for filing your federal income tax return for the year.
Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan.
Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70 ½.
The content provided on this page is for informational purposes only and does not constitute a complete analysis of the rules governing the creation and use of a Savings Incentive Match Plan for Employees (SIMPLE). It is intended to provide an overview only of the benefits, eligibility requirements, and funding limitations of SIMPLE IRAs. For complete details regarding this type of savings plan, including definitions of a qualified compensation, distributions, and tax reporting, refer to IRS Publication 560.