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Operating a SIMPLE IRA Plan

Who is eligible to participate in a SIMPLE IRA plan?

Generally, any employee who has received at least $5,000 in compensation from you during any 2 preceding calendar years, and is expected to receive at least $5,000 in compensation in the current calendar year. Learn more.

What are the contribution rules?

SIMPLE IRAs hold the contributions made for each eligible employee. A SIMPLE IRA is funded by:

  • Employee elective deferrals (also referred to as salary reduction contributions)
    • limited to $12,000 in 2013 and 2014*
    • For employees age 50 or over, a $2,500 “catch-up” contribution is also allowed (in 2013 and 2014)*

  • Employer must annually choose one of the contribution methods below. The employer must tell employees during the election period which method will be used for that year
    • 2% nonelective contribution - 2% of each eligible employee’s compensation regardless of whether or how much the employee deferred, or
    • 3% matching contribution - match of employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee's compensation.
      • May reduce the 3% limit to a lower percentage, but in any event, not lower than 1%. May not lower the 3% limit for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective.

    • The employer cannot make any other contributions to a SIMPLE IRA plan.

*Each employee’s total contributions are limited and subject to annual cost-of-living-adjustments. If you miscalculated a participant’s contribution, find out how you can correct this mistake.

SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Note that employees can move their SIMPLE IRA assets from one SIMPLE IRA to another.

In operation, you must follow the definition of compensation stated in the plan document. Compensation generally includes the pay a participant received from you for personal services for a year. If you used the wrong compensation to calculate a participant’s deferrals or employer contributions, find out how you can correct this mistake.

Automatic Enrollment: A plan feature allowing an employer to automatically deduct a fixed percentage or amount from an employee’s wages and contribute that to the SIMPLE IRA plan unless the employee has affirmatively chosen to contribute nothing or to contribute a different amount. These automatic enrollment contributions qualify as elective deferrals.

Annual Election Period: Each year employees can change their contribution levels during the plan's election period. This election period must be at least 60 days long, and employees must receive prior notice about an upcoming election opportunity. SIMPLE IRA plans must have an annual election period extending from November 2 to December 31. A plan can have more election periods each year in addition to this 60-day election period.

When employees want to stop contributions

Employees may elect to terminate their salary reduction contributions to a SIMPLE IRA plan at any time. If they do so, the SIMPLE IRA plan may preclude them from resuming salary reduction contributions until the beginning of the next calendar year. Employers that are making nonelective employer contributions must continue to make them on behalf of these employees.

When and where are contributions made?

  • Employee salary reduction contributions - within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee (including self-employed individuals) in cash

  • Employer matching or nonelective contributions - by the due date (including extensions) for filing your federal income tax return for the year

If you haven’t deposited contributions by their due date, find out how you can correct this mistake.

After you send the SIMPLE IRA plan contributions to the financial institution you selected, that institution will manage the funds. It's worth noting that employees can move their SIMPLE IRA assets from one SIMPLE IRA to another. SIMPLE IRA plan contributions can be put into stocks, mutual funds, and other similar types of investments. Each employee makes the investment decisions for his or her own account.

You will need to give each participating employee an annual statement indicating the amount contributed to his/her account for the year.

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?

You must notify each employee before the beginning of the election period of:

  1. The employee’s opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
  2. The employees’ ability to select a financial institution that will serve as trustee of the employees’ SIMPLE IRA, if applicable;
  3. Your decision to make either matching contributions or nonelective contributions;
  4. A summary description (the financial institution should provide this information); and
  5. 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.

What are the basic distribution/withdrawal rules?

SIMPLE IRA contributions and earnings can be withdrawn at any time, subject to the general limitations imposed on traditional IRAs. A withdrawal is taxable in the year received. If a participant makes a withdrawal before he or she attains age 59 ½, generally a 10% additional tax applies. If this withdrawal occurs within the first 2 years of participation, the 10% tax is increased to 25%.

A participant who withdraws funds from a SIMPLE IRA may continue to participate in the employer’s SIMPLE IRA plan.

SIMPLE IRA contributions and earnings must eventually be distributed following the IRA required minimum distribution rules.

Rollovers

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 are not permitted.

What are the filing and notice requirements?

Filing requirements: An employer generally has no filing requirements, including the Form 5500 return.

W-2 Reporting: SIMPLE IRA contributions are not included in the “Wages, tips, other compensation” box of Form W-2, Wage and Tax Statement, but check the Retirement Plan box in box 13. For more information, see the instructions for Forms W-2 and W-3. Salary reduction contributions must be included in the boxes for Social Security and Medicare wages.

SIMPLE IRA 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.

Reporting employer deductions of contributions. The employer can deduct its contributions to a SIMPLE IRA plan.

  • Sole proprietors may deduct SIMPLE IRA contributions for employees on Schedule C (Form 1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming.
  • Partnerships deduct contributions for employees on Form1065, U.S. Return of Partnership Income.
  • Sole proprietors and partners may deduct contributions for themselves on Form 1040, U.S. Individual Income Tax Return. (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., you get from the partnership).
  • Corporations deduct contributions on Form 1120, U.S. Corporation Income Tax Return, Form 1120-A, U.S. Corporation Short-Form Income Tax Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.

How can I tell if my plan is operating within the rules?

You should conduct an annual self-audit to help determine whether your SIMPLE IRA plan is operating within the rules. Checklists and tips are available to help with periodic reviews of your plan.

What do I do if I made a mistake in operating my plan?

Generally, if the SIMPLE IRA plan fails to satisfy the requirements for SIMPLE IRA plans, tax benefits can be lost. However, any error can likely be corrected by using one of the IRS correction programs.

Additional resources

 

Page Last Reviewed or Updated: 02-Apr-2014