Who is eligible for participation?

Although you may not impose a minimum age requirement in a SIMPLE IRA plan, you may specify in the SIMPLE IRA plan document that, to participate, an employee must:

1. have received at least $5,000 in compensation from you during any 2 preceding years, and
   
   
2. is expected to receive at least $5,000 in compensation in the current year.

The following employees do not need to be covered under your SIMPLE IRA plan:

1. Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and you.
   
   
2. Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.

What are the contribution requirements?

The SIMPLE IRA plan contribution is dependent upon which contribution formula you have chosen in your SIMPLE IRA plan document.

• If you decide to make a 2% nonelective contribution, then each eligible employee must receive a contribution equal to 2% of compensation regardless of whether the employee makes contributions.
  
  
• However, if you decide to make the dollar-for-dollar match up to 3% of pay, then only the eligible employees who have elected to make contributions will receive an employer contribution, i.e., the matching contribution.
  
  Note that you may reduce this 3% to a lower percentage, but not lower than 1%. You may not lower the 3% for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective.

After you send the SIMPLE IRA plan contributions to the financial institution, that institution will manage the funds.  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.  

Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

What are the contribution limits?  

Employee - $11,500 in 2009 and 2010.  If the employee is age 50 or over, a “catch-up” contribution is also allowed.  This additional catch-up contribution amount is:  2009 and 2010 - $2,500.

Employer – Generally, a dollar-for-dollar match up to 3% of pay or a 2% nonelective contribution for each eligible employee.

What information do I need to give to my employees?

You must also provide each eligible employee with the following information prior to the beginning of the election period:

1. Employee’s opportunity to enter into a salary reduction agreement or to modify a prior agreement.
   
   
2. Employer’s decision to make either matching contributions or non-elective contributions.
   
   
3. Summary description (provided to you by the financial institution).  (If used, Form 5304-SIMPLE or Form 5305-SIMPLE may satisfy this requirement.)
   
   
4. Written notice that the employee’s balance can be transferred without cost or penalty if you use a designated financial institution.

Generally, the election period is the 60-day period immediately preceding January 1 of a calendar year (i.e., November 2 to December 31).

You generally have no filing requirements. The financial institution handles most of the paperwork.
 
What are the basic distribution/withdrawal rules?

SIMPLE IRA contributions and earnings can be withdrawn at any time.  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%.

SIMPLE IRA contributions and earnings must eventually be distributed.  A specific minimum amount is required to be distributed by April 1 of the year following the year the participant reaches age 70 ½.  (For further details regarding the required minimum distribution amount, see Publication 590.)
         
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. 

How does a SIMPLE IRA plan work?

Example 1:

Elizabeth works for the Rockland Quarry Company, a small business with 50 employees.  Rockland has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s salary.  Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution from Rockland.

Elizabeth has a yearly salary of $50,000 and decides to contribute 5% of her salary to her SIMPLE IRA.  Elizabeth’s yearly contribution is $2,500 (5% of $50,000).  The Rockland matching contribution is $1,500 (3% of $50,000).  Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus the $1,500 contribution from Rockland).  The financial institution partnering with Rockland on the SIMPLE IRA plan has several investment choices and Elizabeth is free to pick and choose which ones suit her best.

Example 2:

Austin has worked five years for the Skidmore Tire Company, a small business with 75 employees.  Skidmore has decided to establish a SIMPLE IRA plan for all its employees and will make a 2% nonelective contribution for each of its employees.  Under this option, even if a Skidmore employee does not contribute to his or her SIMPLE IRA, that employee would still receive an employer contribution to his or her SIMPLE IRA equal to 2% of salary.

Austin has a yearly salary of $40,000 and has decided that this year, he simply cannot make a contribution to his SIMPLE IRA.  Even though Austin does not make a contribution this year, Skidmore must make a contribution of $800 (2% of $40,000). The financial institution partnering with Skidmore on the SIMPLE IRA plan has several investment choices and Austin has the same investment options as the other plan participants.

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 correction programs described in the Retirement Plans Correction Programs brochure.