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Savings Incentive Match Plans for Employees (SIMPLE IRA)
SIMPLE plans were designed to encourage more small companies to establish retirement plans. Simples are less complicated to set-up and administer and allow for salary deferral contributions to IRA accounts.
- Salary deferral contributions made by the employees and employer contributions made to the participant’s SIMPLE IRA are deductible by the employer.
- Complicated non-discrimination testing and 5500 reporting is not required.
- Earnings accumulate in the account tax deferred.
- Employees consider salary deferral plans a valuable benefit.
- Employer has no fiduciary responsibility. Contributions are invested in individual’s IRA, and individual makes all investment decisions.
For more information visit www.irs.gov.
Employer Eligibility
- Limited to employers with less than 100 or fewer employees during the preceding year who received at least $5,000 in compensation from the employer.
- Can defer up to 100% of compensation not to exceed $10,500.
- Plan may not be established for year after October 1st.
- The employer may not maintain any other employer sponsored retirement plan for the year for which the SIMPLE plan is maintained.
- Eligible entities include corporations, partnerships, tax-exempt organizations, “S” corporations, and sole proprietors.
Simple IRA Contributions
When an employee elects to make salary deferral contributions to a SIMPLE IRA account, there is no limit on the percentage of the salary deferral; and the employee may elect to defer up to 100% of his compensation, provided the total contribution amount does not exceed the annual deferral limit.
The elective deferral limits for SIMPLE IRA’s are presented below along with additional “catch up” salary deferral contributions may be made to SIMPLE IRA accounts for participants who have attained the age of 50 by year-end.
Year |
Limit |
Catch-Up |
Total |
| 2007 | $10,500 | $2,500 | $13,000 |
| 2008 | $10,000 | $2,500 | $13,000 |
Elective deferrals to a SIMPLE IRA are excluded from the gross income of the participant
Employer Contributions
An employer who sponsors a SIMPLE plan must make some type of contribution for his employees; however he has the option of making either matching contributions or non-elective contributions for any tax year.
If the employer chooses matching contributions, he is generally required to match the employee’s elective deferral contribution dollar for dollar up to 3% of the employee’s compensation. If the employer chooses non-elective contributions, he is required to contribute an amount equal to 2% of each eligible employee’s compensation for each employee who is eligible to participate and has earned at least $5,000 in compensation for the year.
SIMPLE Rollovers and Transfers
Rollovers and transfers must only be made between SIMPLE accounts, not between SIMPLE and other IRA accounts. After the two-year holding period has elapsed, the participants may rollover assets from the SIMPLE account to an IRA, or convert the assets to a Roth IRA.
Simple Distributions
Distributions from a SIMPLE IRA are taxed as ordinary income when distributed. Distributions from a SIMPLE IRA follow all the rules for distributions from a traditional IRA, with two exceptions:
- 1. Simple Pre-2 Year Distributions
The IRS imposes a 25% penalty on distributions taken from a SIMPLE IRA within two years of the date of the first contribution to the Simple account. - 2. Required Beginning Date May Be Delayed
if a person is still working and has compensation once they have attained the age of 70½, required minimum distributions may be delayed until the year following the year the participant retires.
Deductibility limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax advisor.