Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)

What Is a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)?

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a type of tax-deferred retirement account that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to a SIMPLE account.

The employer may make either matching or non-elective contributions to each eligible employee's SIMPLE IRA, and employees may make salary deferral contributions.

Key Takeaways

  • A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a tax-deferred retirement account that enables small employers to contribute to their employees' and their own retirement savings.
  • Only employers who do not offer other retirement plans and have fewer than 100 employees can set up and offer a SIMPLE IRA.
  • SIMPLE IRAs are easier for an employer to establish and have lower administrative and start-up costs than many other retirement plans.
  • SIMPLE IRAs require employers to make a minimum contribution to the employee's account.
  • The employer's yearly contribution can be either a matching contribution up to 3% of compensation or a 2% nonelective contribution for each eligible employee.

Understanding SIMPLE Plans

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan, similar in some ways to 401(k) and 403(b) plans. SIMPLE IRAs are easier to implement and have lower start-up and administrative costs than many other retirement plans. The employer does not have filing requirements with a SIMPLE IRA.

According to Internal Revenue Service (IRS) regulations, only employers with fewer than 100 employees—and which do not offer other retirement plans—may establish a SIMPLE IRA. All employees who received $5,000 or more in compensation from an employer during any two previous calendar years and who are expected to receive $5,000 or more in compensation this year are eligible to participate in the employer’s SIMPLE IRA plan.

A SIMPLE IRA has the same rules on investments, distributions, and rollovers as traditional individual retirement accounts (IRAs).

The Employer's Two Alternatives

SIMPLE IRAs require employers to make a minimum contribution to the account, while employees are not required to contribute. The employer has two alternatives when it comes to making these contributions. The first is to match the amounts that employees make toward their own elective-deferral contribution up to 3% of the employee's annual compensation.

The second alternative is for the employer to make a flat 2% nonelective contribution to all qualified employees, regardless of whether the employee makes any contributions.

Contributions to SIMPLE IRAs are immediately 100% vested, and the IRA owner directs the investments.

Limitations of a SIMPLE Plan

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) has lower contribution limits than most other employer-sponsored retirement plans. For 2022, the contribution limit is $14,000 (up from $13,500 in 2021). Those aged 50 or older can make a catch-up contribution of an extra $3,000 for both 2021 and 2022.

A SIMPLE IRA can only be rolled over to a traditional IRA after a two-year waiting period, beginning from the day that the employee first participated in the plan.

How Does an Employer Start a SIMPLE IRA Plan?

There are three steps to start a SIMPLE IRA plan:

  1. Sign an IRS Form 5304-SIMPLE, Form 5305-SIMPLE, or an IRS-approved prototype SIMPLE IRA plan offered by a qualified financial institution.
  2. Provide eligible employees with information about the SIMPLE IRA plan.
  3. Establish a SIMPLE IRA account for each eligible employee using either a custodial account or trust account.

Which Employees Can Participate in a SIMPLE Plan?

To be eligible to participate in an employer's SIMPLE Plan for a calendar year, an employee must have received at least $5,000 in compensation from the employer during any two preceding calendar years (whether consecutive or not). The employee must also reasonably be expected to earn a minimum of $5,000 in compensation for the calendar year.

Under certain circumstances, an employer can choose to exclude an employee from a SIMPLE plan. For example, an employer can choose to exclude employees who are covered by certain types of collective bargaining agreements.

Can Employees Opt-Out of a SIMPLE IRA Plan?

No, eligible employees may not opt-out of participating in an employer's SIMPLE IRA plan. They can, however, decide not to make contributions to the plan that would reduce their salary. They would then not receive any matching contributions if the employer offers these. They would receive nonelective contributions from the employer if the plan offers this.

Article Sources

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  1. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Pages 9-11.

  2. Internal Revenue Service. "SIMPLE IRA Plan."

  3. Internal Revenue Service. "IRS Announces 401(k) Limit Increases to $20,500."

  4. Internal Revenue Service. "SIMPLE IRA Plan FAQs," Select, "Rollovers."

  5. Internal Revenue Service. "SIMPLE IRA Plan FAQ," Select, "Establishing a SIMPLE IRA Plan."

  6. Internal Revenue Service. "SIMPLE IRA Plan FAQs," Select, "Participation."

  7. Internal Revenue Service. "SIMPLE IRA Plan FAQs," Select, "May a participant "opt out" of a SIMPLE IRA plan?"