SIMPLE Retirement Plan A SIMPLE plan (Savings Incentive Match Plan for Employees) is awritten salary reduction arrangement that allows a small business (anemployer with 100 or fewer employees) to make elective contributionsto a SIMPLE retirement account on behalf of each eligible employee. Aneligible employer (defined later) is generally not allowed to maintainanother retirement plan. Setting Up a SIMPLE Plan If an employer has 100 or fewer employees who were paid at least$5,000 by the employer in the preceding year, the employer may be ableto set up a SIMPLE retirement plan on behalf of eligible employees.The plan can be either of the following. A SIMPLE IRA for each eligible employee. Part of a qualified cash or deferred arrangement (a 401(k)plan). The SIMPLE plan generally must be the only retirement plan ofthe employer to which contributions are made, or benefits are accrued,for service in any year beginning with the year the SIMPLE planbecomes effective. Contributions to a SIMPLE plan are deductible by the employer andexcluded from the gross income of the employee. Definitions Lloret de Mar locandaSIMPLE retirement account.The SIMPLE retirement account of an eligible employee hôtels Calaisisan individual retirement plan that can be either an individualretirement account or an individual retirement annuity, as describedin Publication 590.Employees' rights to the contributions cannot beforfeited. A SIMPLE plan can also be set up as a 401(k) plan. See Publication 560ERROR MSGfor information on how to adopt a SIMPLE plan as part of a 401(k)plan. Qualified salary reduction arrangement.This is an arrangement that allows an eligible employee to choose,during the 60-day period before the beginning of any year, to have theemployer make contributions (elective deferrals) to a SIMPLEretirement account on his or her behalf. An eligible employee may alsostop making elective deferrals at any time during the year. Theemployer must match the employee's contributions or make nonelectivecontributions. No other types of contributions are allowed under aqualified salary reduction arrangement. Eligible employer.Any employer who has 100 or fewer eligible employees inany year and does not maintain another employer-sponsored retirementplan can set up a SIMPLE plan. Eligible employee.Any employee who receives at least $5,000 in compensation duringany 2 years preceding the plan year and is expected to earn at least$5,000 during the calendar year can choose to have his or her employermake contributions to a SIMPLE retirement account under a qualifiedsalary reduction arrangement. Compensation.Compensation is the total wages required to be reported on FormW-2 plus elective deferrals. For a self-employed individual,compensation is net earnings from self-employment. It does not includeany contribution made to the SIMPLE plan. TaxTip: Any SIMPLE elective deferrals made for an employee under a salaryreduction arrangement are included in wages on the employee's FormW-2 for social security and Medicare tax purposes only. Contribution Limits Contributions include employee elective deferrals and employercontributions. The employer must satisfy one of two contributionformulas: the matching contribution formula or a 2% nonelectivecontribution. No other contributions can be made to the SIMPLE plan.These contributions, which are deductible by the employer, must bemade timely. Employee elective deferral limit.The amount that the employee chooses to have the employercontribute to a SIMPLE retirement account on his or her behalf(elective deferrals) must not exceed $6,000 for any year and must beexpressed as a percentage of the employee's compensation. Dollar-for-dollar employer matching contributions.The employer must match all eligible employees' electivecontributions on a dollar-for-dollar basis, up to 3% of theemployee's compensation. Caution: If the employer chooses a matching contribution of less than3%, the percentage cannot be less than 1%. The employermust notify the employee of the lower percentage within a reasonabletime before the 60-day election period for the calendar year. Apercentage of less than 3% cannot be chosen for more than 2years during a 5-year period. Nonelective contributions.In place of the dollar-for-dollar matching contributions, theemployer can choose to make nonelective contributions of 2% ofcompensation on behalf of each eligible employee. Only $160,000 of theemployee's compensation can be taken into account when figuring thecontribution limit. Caution: An employer who chooses the 2% contribution formula musttimely notify the employee (within the 60-day election perioddescribed earlier). Time limits for contributing funds.The employer must make the contribution to the SIMPLE accountwithin 30 days after the end of the month for which the payments tothe employee were deferred. The employer's matching contributions mustbe made by the due date of the tax return, including extensions, forthe year. Distributions (Withdrawals) Distributions from a SIMPLE retirement account are subject to theIRA rules and are generally includible in income when withdrawn.Tax-free rollovers can be made from one SIMPLE account into anotherSIMPLE account or into an IRA. Early withdrawals generally are subjectto a 10% (or 25%) additional tax. Exceptions.A rollover to an IRA can be made tax free only after participating2 years in the SIMPLE plan. A 25% additional tax for earlywithdrawal applies if funds are withdrawn within 2 years of beginningparticipation. Employee notification.The employer must notify each eligible employee of his or heropportunity to make contributions under a SIMPLE plan. The employermust also notify all eligible employees of the contributionalternative that was chosen. This information must be provided beforethe beginning of the employee's 60-day election period. More information.This chapter does not cover all the rules and exceptions that applyto a SIMPLE IRA or a SIMPLE 401(k) plan. See Publication 560luxury hotels in Naplesforadditional information on excludable employees, reporting anddisclosure requirements, and other rules. Also, see Form5304-SIMPLE or Form 5305- SIMPLE and their instructions. See Publication 590for information about IRA rules, includingthose on the tax treatment of distributions, rollovers, requireddistributions, and income tax withholding.