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This chapter is for employees who need information about savings incentive match plans for employees (SIMPLE plans). It explains what a SIMPLE plan is, contributions to a SIMPLE plan, and distributions from a SIMPLE plan.
Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as:
Part of a 401(k) plan, or
A plan using IRAs (SIMPLE IRA).
This chapter only discusses the SIMPLE plan rules that relate to SIMPLE IRAs. See chapter 3 of Publication 560 for information on any special rules for SIMPLE plans that do not use IRAs.
A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. See chapter 3 of Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan.
A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to:
Reduce your compensation (salary) by a certain percentage each pay period, and
Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. These contributions are called salary reduction contributions.
All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Contributions are made on behalf of eligible employees. (See Eligible Employees below.) Contributions are also subject to various limits. (See How Much Can Be Contributed on Your Behalf , later.)
In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. See How Are Contributions Made , later.
You must be allowed to participate in your employer's SIMPLE plan if you:
Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and
Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made.
Employees whose retirement benefits are covered by a collective bargaining agreement (union contract).
Employees who are nonresident aliens and received no earned income from sources within the United States.
Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year.
Wages, tips, and other pay from your employer that is subject to income tax withholding.
Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457) plans, SEP plans, and SIMPLE plans.
Contributions under a salary reduction agreement are called salary reduction contributions. They are made on your behalf by your employer. Your employer must also make either matching contributions or nonelective contributions.
The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made.
Additional elective deferrals can be contributed to your SIMPLE plan if:
You reached age 50 by the end of 2013, and
No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.
The most that can be contributed in additional elective deferrals to your SIMPLE plan is the lesser of the following two amounts.
$2,500 for 2013, or
Your compensation for the year reduced by your other elective deferrals for the year.
The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them.
In 2013, Joshua was a participant in his employer's SIMPLE plan. His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Instead of taking it all in cash, Joshua elected to have 12.5% of his weekly pay ($100) contributed to his SIMPLE IRA. For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $12,000 limit on these contributions.
Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600).
Assume the same facts as in Example 1 , except that Joshua's compensation for the year was $408,163 and he chose to have 2.94% of his weekly pay contributed to his SIMPLE IRA.
In this example, Joshua's salary reduction contributions for the year (2.94% × $408,163) were equal to the 2013 limit for salary reduction contributions ($12,000). Because 3% of Joshua's compensation ($12,245) is more than the amount his employer was required to match ($12,000), his employer's matching contributions were limited to $12,000.
In this example, total contributions made on Joshua's behalf for the year were $24,000 ($12,000 (Joshua's contributions) + $12,000 (matching contributions)), the maximum contributions permitted under a SIMPLE IRA for 2013.
The limit is not reduced below 1%,
The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and
Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements.
Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution.
This notice is provided within a reasonable period during which employees can enter into salary reduction agreements.
Assume the same facts as in Example 2 , except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Because his employer's nonelective contributions are limited to 2% of up to $255,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $5,100. In this example, total contributions made on Joshua's behalf for the year were $17,100 (Joshua's salary reductions of $12,000 plus his employer's contribution of $5,100).
Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. These rules are discussed in chapter 1.
Your employer cannot restrict you from taking distributions from a SIMPLE IRA.
Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. See Additional Tax on Early Distributions, later.
Generally, rollovers and trustee-to-trustee transfers are not taxable distributions.
The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%.
If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed.
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