Savings Incentive Match Plans for Employees (SIMPLE)
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 section discusses the SIMPLE plan rules that relate to SIMPLE IRAs.
See Publication 560 for information on any special rules for SIMPLE plans
that do not use IRAs.
NOTE: If your employer maintains a SIMPLE plan, you must be notified, in
writing, that you can choose the financial institution that will serve as
trustee for your SIMPLE IRA and that you can roll over or transfer your
SIMPLE IRA to another financial institution.
Important Changes for 2004
What's New for 2005?
What Is a SIMPLE Plan?
How Are Contributions Made?
How Much Can Be Contributed on Your Behalf?
When Can You Withdraw or Use Assets?
Are Distributions Taxable?
Important Changes for 2004
Compensation limit. For
2004, the maximum compensation used for figuring contributions
and benefits increases to $205,000. This amount increases to
$210,000 in 2005.
Elective deferrals. The
limit on elective deferrals increases to $13,000 for tax years
beginning in 2004 and then increases $1,000 each tax year
thereafter until it reaches $15,000 in 2006. These new limits
will apply for participants in SARSEPs, 401(k) plans (excluding
SIMPLE plans), and deferred compensation plans of state or local
governments and tax-exempt organizations. The $15,000 figure is
subject to cost-of-living increases after 2006.
Catch-up contributions. A plan
can permit participants who are age 50 or over at the end of the
calendar year to also make catch-up contributions. The catch-up
contribution limit for 2004 is $3,000. This limit increases by
$1,000 each year thereafter until it reaches $5,000 in 2006. The
limit is subject to cost-of-living increases after 2006. The
catch-up contribution a participant can make for a year cannot
exceed the lesser of the following amounts.
| The catch-up contribution limit. |
| The excess of the participant's
compensation over the elective deferrals that are not
catch-up contributions. |
SIMPLE plan salary reduction
contributions. The limit on salary
reduction contributions to a SIMPLE plan increases to $9,000
beginning in 2004 and then increases to $10,000 in 2005. The
$10,000 figure is subject to adjustment after 2005 for
cost-of-living increases. Catch-up
contributions. A SIMPLE plan can permit participants who
are age 50 or over at the end of the calendar year to make
catch-up contributions. The catch-up contribution limit for 2004
is $1,500. This limit increases by $500 each year thereafter
until it reaches $2,500 in 2006. The limit is subject to
cost-of-living increases after 2006. The catch-up contributions
a participant can make for a year cannot exceed the lesser of
the following amounts.
| The catch-up contribution limit. |
| The excess of the participant's
compensation over the salary reduction contributions that
are not catch-up contributions. |
Rollover distributions. Final
Department of Labor regulations were issued implementing rules on
fiduciary responsibilities relating to automatic rollovers of
certain mandatory distributions to individual retirement plans.
The final regulations apply to the rollover of mandatory
distributions made on or after March 28, 2005. See
Involuntary cash-out of benefits not
more than dollar limit under
Qualification Rules in Chapter 4.
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What Is a SIMPLE Plan?
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 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. Contributions are made on
behalf of eligible employees. Contributions
are also subject to various limits.
In addition to salary reduction contributions,
your employer must make either matching
contributions or nonelective contributions.
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. |
Self-employed individual. For SIMPLE plan purposes, the term
employee includes a self-employed individual who received earned income.
Excludable employees. Your employer can exclude the following
employees from participating in the SIMPLE plan.
| 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. |
Compensation. For purposes of the SIMPLE plan rules, your
compensation for a year generally includes the following amounts.
| 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. |
Self-employed individual compensation. For purposes of the SIMPLE
plan rules, if you are self-employed, your compensation for a year is your
net earnings from self-employment (line 4, Section A, or line 6, Section
B, of Schedule SE (Form 1040)) before subtracting any contributions made
to a SIMPLE IRA on your behalf.
For these purposes, net earnings from self-employment include
services performed while claiming exemption from self-employment tax as a
member of a group conscientiously opposed to social security benefits.
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How Are Contributions Made?
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.
Salary reduction contributions. During the 60-day
period before the beginning of any year, and during the 60-day period
before you are eligible, you can choose salary reduction contributions
expressed either as a percentage of compensation, or as a specific dollar
amount (if your employer offers this choice). You can choose to cancel the
election at any time during the year.
Salary reduction contributions are also referred to as “elective
deferrals.”
Your employer cannot place restrictions on the contributions amount
(such as by limiting the contributions percentage), except to comply with
the salary reduction contributions limit.
Matching contributions. Unless your employer
chooses to make nonelective contributions, your employer must make
contributions equal to the salary reduction contributions you choose
(elect), but only up to certain limits. These contributions are in
addition to the salary reduction contributions and must be made to the
SIMPLE IRAs of all eligible employees (defined earlier) who chose salary
reductions. These contributions are referred to as matching contributions.
Matching contributions on behalf of a self-employed individual are
not treated as salary reduction contributions.
Nonelective contributions. Instead of making matching contributions,
your employer may be able to choose to make nonelective contributions on
behalf of all eligible employees. These nonelective contributions must be
made on behalf of each eligible employee who has at least $5,000 of
compensation from your employer, whether or not the employee chose salary
reductions.
One of the requirements your employer must satisfy is notifying the
employees that the election was made. For other requirements that your
employer must satisfy, see Publication 560.
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How Much Can Be Contributed on
Your Behalf?
The limits on contributions to a SIMPLE IRA vary with the type of
contribution that is made.
Salary reduction contributions limit. Salary
reduction contributions (employee-chosen contributions or elective
deferrals) that your employer can make on your behalf under a SIMPLE plan
are limited to $9,000 for 2004 ($10,000 for 2005).
If you are a participant in any other employer plans during 2004 and you
have elective salary reductions or deferred compensation under those plans,
the salary reduction contributions under the SIMPLE plan also are included
in the annual limit of $13,000 for 2004 ($14,000 for 2005) on exclusions of
salary reductions and other elective deferrals.
You, not your employer, are responsible for monitoring compliance with
these limits.
Additional elective deferrals can be contributed to your SIMPLE if:
| You reached age 50 by the end of 2004, 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 is the lesser of the following two amounts.
- $1,500 for 2004 ($2,000 for 2005), 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.
Matching employer contributions limit. Generally,
your employer must make matching contributions to your SIMPLE IRA in an
amount equal to your salary reduction contributions. These matching
contributions cannot be more than 3% of your compensation for the calendar
year.
Matching contributions less than 3%. Your employer can reduce
the 3% limit on matching contributions for a calendar year, but only if:
- 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.
For purposes of applying the rule in item (2) in determining whether
the limit was reduced below 3% for the year, any year before the first
year in which your employer (or a former employer) maintains a SIMPLE IRA
plan will be treated as a year for which the limit was 3%. If your
employer chooses to make nonelective contributions for a year, that year
also will be treated as a year for which the limit was 3%.
Nonelective employer contributions limit. Instead
of matching contributions, you can choose to make nonelective
contributions of 2% of compensation on behalf of each eligible employee
who has at least $5,000 (or some lower amount you select) of compensation
from you for the year. If you make this choice, you must make nonelective
contributions whether or not the employee chooses to make salary reduction
contributions. Only $205,000 of the employee's compensation can be taken
into account to figure the contribution limit.
If you choose this 2% contribution formula, you must notify the employees
within a reasonable period of time before the 60-day election period
Traditional IRA mistakenly moved to SIMPLE IRA. If you
mistakenly roll over or transfer an amount from a traditional IRA to a
SIMPLE IRA, you can later recharacterize the amount as a contribution to
another traditional IRA. 1.
Recharacterizing employer contributions. You cannot recharacterize
employer contributions (including elective deferrals) under a SEP or
SIMPLE plan as contributions to another IRA. SEPs are discussed in
Publication 560.
Converting from a SIMPLE IRA. Generally, you can convert an amount
in your SIMPLE IRA to a Roth IRA under the same rules explained under
Converting From Any Traditional IRA Into a Roth
IRA.
However, you cannot convert any amount distributed from the SIMPLE
IRA during the 2-year period beginning on the date you first participated
in any SIMPLE IRA plan maintained by your employer.
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When Can You Withdraw or
Use Assets?
Generally, the same distribution (withdrawal) rules that apply to
traditional IRAs apply to SIMPLE IRAs.
Your employer cannot restrict you from taking distributions from a
SIMPLE IRA.
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Are Distributions
Taxable?
Generally, distributions from a SIMPLE IRA are fully taxable as
ordinary income. If the distribution is an early distribution, it may be
subject to the additional tax on early distributions.
Rollovers and Transfers Exception
Generally, rollovers and trustee-to-trustee transfers are not
taxable distributions.
Two-year rule. To qualify as a tax-free
rollover (or a tax-free trustee-to-trustee transfer), a rollover
distribution (or a transfer) made from a SIMPLE IRA during the
2-year period beginning on the date on which you first participated
in your employer's SIMPLE plan must be contributed (or transferred)
to another SIMPLE IRA. The 2-year period begins on the first day on
which contributions made by your employer are deposited in your
SIMPLE IRA.
After the 2-year period, amounts in a SIMPLE IRA can be rolled
over or transferred tax free to an IRA other than a SIMPLE IRA, or
to a qualified plan, a tax-sheltered annuity plan (section 403(b)
plan), or deferred compensation plan of a state or local government
(section 457 plan).
Additional Tax on Early 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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from IRS Publication 560
-
Retirement Plans for Small Business
and IRS Publication 590
-
Individual Retirement Arrangements (IRAs)
This and other publications mentioned can be found at
http://www.irs.gov
