A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is a retirement savings plan adopted by a business that allows both employers and employees to make retirement savings contributions. Each eligible employee sets up a SIMPLE Individual Retirement Account (SIMPLE IRA) to receive the SIMPLE IRA plan contributions.
A SIMPLE IRA plan is easy to establish, simple to administer, and inexpensive compared to other types of retirement plans, such as 401(k) plans. There are no compliance tests and employers are not required to file annual reports with the IRS. Employees share the responsibility of funding the plan with their employers.
Any type of employer, including a self-employed individual, can establish a SIMPLE IRA plan, but the employer must generally have 100 or fewer employees. When calculating the 100-employee limit, employers count individuals employed by the business during the previous calendar year who earned $5,000 or more. Employers adopting SIMPLE IRA plans are also restricted from having any other type of employer-sponsored retirement plan (e.g., 401(k) plan).
Establishing a SIMPLE IRA plan requires three steps:
If you establish the SIMPLE IRA plan with a document that names a designated financial institution (DFI), all contributions will be made to SIMPLE IRAs held at that institution. If the document does not specify a DFI, employees can establish their SIMPLE IRAs at any financial institution they choose. If you use a DFI, employees must be permitted to transfer their balance without cost or penalty to another SIMPLE IRA. For simplicity and ease of administration, many employers use a DFI.
A SIMPLE IRA plan can be set up any time between January 1 and October 1 in the year you first adopt the plan. For example, an employer that wants to make a SIMPLE IRA plan contribution for 2018 would generally have until October 1, 2018, to set up the SIMPLE IRA plan. A new business that is established after October 1 may adopt a SIMPLE IRA plan as soon as administratively feasible after the business comes into existence.
Your SIMPLE IRA plan must cover all employees who
You can choose to apply less restrictive eligibility requirements.
Employees who are covered by a collective bargaining unit or who are nonresident aliens with no U.S. source income can be excluded, along with employees who haven’t met the eligibility requirements.
Each year, employees can defer up to $12,500 (for 2018), plus an additional $3,000 (for 2018) catch-up contribution if they are age 50 or older. An employer is required to make either a matching contribution (dollar-for-dollar up to 3% of salary deferred into the plan), or a nonelective contribution (2% contribution for all eligible employees). The 3% matching contribution can be reduced to as low as 1% for 2 out of every 5 years, subject to certain employee notice requirements. Employer matching or nonelective contributions are deductible on your business tax return.
A SIMPLE IRA plan does not affect your ability to make annual contributions to a traditional or Roth IRA. In addition to your SIMPLE IRA contributions, you can make traditional or Roth IRA contributions of up to $5,500 (for 2018), plus a $1,000 catch-up contribution if you are age 50 or older. Participating in a SIMPLE IRA plan may affect your ability to take a tax deduction for a traditional IRA contribution, depending on your income.
You can take distributions from your SIMPLE IRA, including employer matching or nonelective contributions, at any time. The distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution penalty if you are not yet age 59½. The early distribution tax rises to 25% for distributions taken within 2 years after the first contribution to your SIMPLE IRA.