A SIMPLE IRA plan -an acronym for Savings Incentive Match PLan for Employees- allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan.

  • Available to any small business – generally with 100 or fewer employees
  • Easily established by adopting Form 5304-SIMPLE, Form 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document
  • Employer cannot have any other retirement plan
  • No filing requirement for the employer
  • Contributions:
    • Employer is required to contribute each year either a:
      • Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
      • 2% nonelective contribution for each eligible employee
        • Under the "nonelective" contribution formula, even if an eligible employee doesn't contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $345,000 for 2024 (subject to cost-of-living-adjustments in later years)
    • Employees may elect to contribute
    • Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money
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SIMPLE IRAs generally can be established by employers with 100 or fewer eligible employees and with no other qualified retirement arrangement in place.

Eligible employees are those who were paid at least $5,000 by the employer during any two preceding years and are expected to earn at least that much during the current year. The employer can exclude employees if they are nonresident aliens or covered under a collective bargaining agreement. These are the minimum standards—an employer may adopt less restrictive rules.

Where Does the Funding Come From?
Allowable contributions include the employee’s elective salary deferrals and the employer’s matching contributions. Or, the employer can choose “nonelective” contributions, which are employer contributions unrelated to amounts contributed by employees. Employee salary deferrals and employer contributions are excludable from participants’ gross income and deductible to the employer in the year made.

Are There Contribution Limits?
Employees may defer up to 100% of compensation up to the annual deferral limit. The limits depend, among other things, on the employee’s age. In 2024, employees under age 50 can defer up to $16,000, while the limit for employees age 50 and over is $19,500.

A SIMPLE IRA isn’t required to allow additional “catch-up” contributions by participants age 50 and over, although such contributions are permitted if specified in the plan terms.

Employers must match employee contributions up to a maximum of 3% of employee compensation for the year. The match can be as low as 1% in no more than two out of the five years ending with the year of the contribution. An alternative is for the employer to make a “nonelective” contribution of 2% of each eligible employee’s annual compensation—up to the maximum includible compensation of $345,000 in 2024—even if the employee doesn’t contribute. All SIMPLE IRA contributions—both the employer’s and the employee’s—are fully vested in the employee at all times.

What About Distributions?
Distributions from SIMPLE IRAs are generally taxed as ordinary income to the recipient. A
10% penalty tax applies to withdrawals before age 591⁄2 unless certain exceptions apply. If the withdrawal occurs within the first two years of the employee’s participation in the plan, the penalty tax is 25% for a participant under age 591⁄2 unless certain exceptions apply. Distributions must begin by age 73. After this time, a 25% penalty tax applies to any amount that should have been distributed but was not (10% if the distribution error is corrected quickly).

A SIMPLE IRA clearly offers many advantages to employers not wanting to take on the complexities, reporting requirements and costs inherent in other qualified retirement plans.

Who owns SIMPLE IRA contributions?
Contributions to SIMPLE IRA accounts are always 100 percent vested, or owned, by the employee.

What information do I need to give to my employees?
Before the beginning of each annual election period, you must notify each employee of:

  • The employee's opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
  • The employees' ability to select a financial institution that will serve as trustee of the employees' SIMPLE IRA, if applicable;
  • Your decision to make either matching contributions or nonelective contributions;
  • A summary description (the financial institution should provide this information); and
  • Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.

If you haven't timely given your employees the notice, find out how you can correct this mistake.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31). However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.

If you set up your SIMPLE IRA plan using either Form 5304-SIMPLE or Form 5305-SIMPLE, you can give each employee a copy of the signed forms to satisfy the notification requirement.

If the deferral limitations aren't released timely and you normally include the deferral amount for the upcoming year in your notice, you can mention the current limit and advise participants to check the COLA Increase table  for next year's amount. The notice isn't required to include the salary deferral limitation for the upcoming year.

SIMPLE IRA contributions and earnings may be rolled over tax-free from one SIMPLE IRA to another. A tax-free rollover may also be made from a SIMPLE IRA to an IRA that is not a SIMPLE IRA, but only after 2 years of participation in the SIMPLE IRA plan.

Participant loans
Loans are not permitted. However, SIMPLE IRA accounts are IRAs and withdrawals may be possible.

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This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.