SIMPLE IRA -Savings incentive match plan for employees of small employers

Definition

Savings incentive match plan for employees of small employers (SIMPLE IRA)

An IRA based  retirement savings vehicle, established by a small business owner for it’s employees. Earnings accrue on a tax-deferred basis and distributions are treated as ordinary income to the participant.

1. A SIMPLE IRA Plan is established by the employer, by completing IRS Form 5304-SIMPLE, form 5305-SIMPLE or the financial institution’s prototype SIMPLE Form
2. A SIMPLE IRA is established by each eligible participant to receive their SIMPLE contributions. Employees establish their SIMPLE IRAs by completing a SIMPLE IA adoption agreement

• The following types of contributions can be made to a SIMPLE IRA

1. Salary deferral contributions by the participants from their compensation on a tax-deferred basis. This means that the contributions reduces the participant’s current taxable compensation
2. Employer contributions. Employers can make either

• • • A matching contribution of $1 for $1 up to 3% of the participant’s compensation. This matching contribution is made only to the SIMPLE IRAs of employees who make salary deferral contributions . This can be reduced to 1% for 2 of every 5-years or
    •  A 2% non-elective contribution to each eligible participant’s SIMPLE IRA, whether or not the employee makes a salary deferral contribution

• Employers are able to deduct employer-contributions to the SIMPLE IRA plan, providing the contributions are within statutory limits.
• Participants may make salary deferral contributions of  up to 100% of their salary/wages up to the dollar limit that is in effect for the year to their SIMPLE IRA . Individuals who reach age 50 by the end of the year may contribute additional amounts referred to as ‘Catch-up’ contributions. The dollar limits are as follows:

• Earnings on contributions accrue on a tax deferred basis
• 100 employee limit:
  • An employer is eligible to establish  A SIMPLE IRA only if it had no more than 100 employees who earned $5,000 or more in the preceding year. This is referred to as the 100-employee limitation
  • For purposes of the 100-employee limitation, all employees employed at any time during the calendar year are taken into account, regardless of whether they are eligible to participate in the SIMPLE IRA Plan
• Calendar year requirement: A SIMPLE IRA Plan may only be maintained on a calendar year basis
• Only plan rule:
  • Generally, an employer cannot make contributions under a SIMPLE IRA Plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA Plan) under which any of its employees receives an allocation of contributions (in the case of a defined contribution plan) or has an increase in a benefit accrued or treated as an accrued benefit under section 411(d)(6) (in the case of a defined benefit plan) for any plan year beginning or ending in that calendar year. In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures replace otherwise required contributions. Exceptions apply
  • For purposes of the only plan rule, a qualified plan is a qualified plan , a pension or trust described in section 219(g)(5) , a qualified 403(a) annuity plan , a 403(b)  plan , a plan established for established for employees of a State, a political subdivision or by an agency or instrumentality of any State or political subdivision (other than an eligible deferred compensation plan described in section 457(b)), a SEP Plan, or a trust described in section 501(c)(18)
• Deadline to establish plan: A SIMPLE IRA plan must be establish by October 1, unless an exception applies.

New SECURE Act 2.0 Provisions:

• For taxable years beginning after December 31, 2022, an employee may elect to have a SIMPLE IRA salary deferral contributions treated as Roth contributions
• Effective for taxable years beginning after December 31, 2024, higher catch-up contributions are allowed.
• Effective for taxable years beginning after December 31, 2023, additional non-elective contributions are allowed

Referring Cite

IRC § 408 (p), IRS Notice 98-4, IRS Publication 590, IRS Publication 560, LRM §§6-7 (April 2005 )

Additional Helpful Information

• The employer must make salary reduction contributions to the financial institution maintaining the SIMPLE IRA no later than the close of the 30-day period following the last day of the month in which amounts would otherwise have been payable to the employee in cash
• SIMPLE IRA contributions must be made in cash
• The 10% early distribution penalty is increased to 25%, if the distribution is made before it has been at least 2-years since the first contribution was made to the SIMPLE IRA
• Employers must provide employees with a Summary Description and a Notification to Eligible employees before the 60-day election period
• Contributions to SIMPLE IRAs are immediately 100% vested
• Compensation definition: Compensation means with respect to an Employee the sum of the wages, tips, and other compensation from the Employer subject to federal income tax withholding (as described in § 6051(a)(3) of the Code) and the Employee’s salary reduction contributions made under this plan, and, if applicable, elective deferrals on behalf of the Employee under a § 401(k) plan, a SARSEP, a § 403(b) annuity contract and compensation from the Employer deferred under a § 457 plan required to be reported by the Employer on Form W-2 (as described under § 6051(a)(8)). ; Compensation also includes amounts paid for domestic service (as described in § 3401(a)(3). Compensation does not include any amounts deferred by the Employee pursuant to a § 125 cafeteria plan. For a self-employed individual, Compensation means the net earnings from self-employment with respect to the Employer determined under § 1402(a) of the Code, without regard to § 1402(c)(6), prior to subtracting any contributions made pursuant to this plan on behalf of the individual.