What is a SIMPLE IRA?
A SIMPLE IRA plan is a Savings Incentive Match Plan for Employees. The plan gives small employers a simplified method to make contributions toward their own and their employees retirement. Under a SIMPLE IRA plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. In addition, as their employer you must contribute matching or nonelective contributions.
A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year.
Deducting contributions to a SIMPLE Plan: You can deduct any contributions that you make to your employees' SIMPLE Plans. In addition, your employees can exclude these contributions from their gross income. SIMPLE IRA plan contributions are not subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Matching and nonelective contributions are not subject to these taxes.
Simple IRA Contributions include salary reduction contributions and employer contributions: 1) matching contributions, or 2) nonelective contributions. No other contributions can be made to a SIMPLE IRA plan.
Salary Reduction Contributions: The amount the employee contributes to a SIMPLE IRA cannot exceed $12,500 in 2016 (not to exceed the employee's gross wages). If an employee participates in any other plan during the year and has elective salary reductions under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $18,000 ($24,000 if over age 50).
If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make "catch-up contributions". The catch-up contribution limit for SIMPLE IRA plans for 2016 is $3,000.
The employer is 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 the employer makes nonelective contributions instead. An employer may choose to make a matching contribution less than 3%, but it must be at least 1% and for no more than 2 out of 5 years. The employer must notify the employees of the lower match within a reasonable period before the 60-day election period for the calendar year.
Nonelective contributions. Instead of matching contributions, an employer can choose to make nonelective contributions of 2% of each eligible employee’s compensation. If the employer makes this choice, it must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. An employee's compensation up to $265,000 (for 2015 and 2016; $270,000 for 2017) is taken into account to figure the contribution limit.
If the employer chooses this 2% contribution formula, it must notify the employees within a reasonable period before the 60-day election period for the calendar year.
Time limits for contributing funds. Employers must deposit employees’ salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the employee would have received them in cash. They must make matching contributions or nonelective contributions by the due date (including extensions) of their federal income tax return for the year.