SIMPLE Retirement Plans A Savings Incentive Match Plan for Employees (SIMPLE plan) is awritten arrangement that provides you and your employees with asimplified way to make contributions to provide retirement income.Under a SIMPLE plan, employees can choose to make salary reductioncontributions to the plan rather than receiving these amounts as partof their regular pay. In addition, you will contribute matching ornonelective contributions. SIMPLE plans can only be maintained on a calendar-year basis. A SIMPLE plan can be set up in either of the following ways. black jack casinosUsing SIMPLE IRAs (SIMPLE IRA plan). As part of a 401(k) plan (SIMPLE 401(k) plan). See Publication 560 for information on SIMPLE 401(k) plans. TaxTip: Many financial institutions will help you set up a SIMPLE plan. SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs foreach eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must beset up for each eligible employee. For the definition of an eligibleemployee, see Who Can Participate in a SIMPLE IRA Plan?,next. Who Can Set Upa SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the followingrequirements. You meet the employee limit. You do not maintain another qualified plan unless the otherplan is for collective bargaining employees. Employee limit.You can set up a SIMPLE IRA plan only if you had 100 or feweremployees who earned $5,000 or more in compensation during thepreceding year. Under this rule, you must take into account allemployees employed at any time during the calendar yearregardless of whether they are eligible to participate. Employeesinclude self-employed individuals who received earned income, andleased employees. Once you set up a SIMPLE IRA plan, you must continue to meet the100-employee limit each year you maintain the plan. Grace period for employers who cease to meet the 100-employeelimit.If you maintain the SIMPLE IRA plan for at least 1 year and youcease to meet the 100-employee limit in a later year, you will betreated as meeting it for the 2 calendar years immediately followingthe calendar year for which you last met it. A different rule applies if you do not meet the 100-employee limitbecause of an acquisition, disposition, or similar transaction. Underthis rule, the SIMPLE IRA plan will be treated as meeting the100-employee limit for the year of the transaction and the 2 followingyears if both the following conditions are satisfied. Coverage under the plan has not significantly changed duringthe grace period. The SIMPLE IRA plan would have continued to qualify afterthe transaction if you had remained a separate employer. Caution: Cannes luxury hotelsThe grace period for acquisitions, dispositions, and similartransactions also applies if, because of these types of transactions,you do not meet the rules explained under Other qualified planor Who Can Participate in a SIMPLE IRA Plan?, below. Other qualified plan.The SIMPLE IRA plan generally must be the only retirement plan towhich you make contributions, or benefits accrue, for service in anyyear beginning with the year the SIMPLE IRA plan becomes effective. Exception.If you maintain a qualified plan for collective bargainingemployees, you are permitted to maintain a SIMPLE IRA plan for otheremployees. Who Can Participatein a SIMPLE IRA Plan? Eligible employee.Any employee who received at least $5,000 in compensation duringany 2 years preceding the current calendar year and is reasonablyexpected to earn at least $5,000 during the current calendar year iseligible to participate. The term "employee" includes aself-employed individual who received earned income. You can use less restrictive eligibility requirements (but not morerestrictive ones) by eliminating or reducing the prior yearcompensation requirements, the current year compensation requirements,or both. For example, you can allow participation for employees whoreceived at least $3,000 in compensation during any preceding calendaryear. However, you cannot impose any other conditions on participatingin a SIMPLE IRA plan. Excludable employees.The following employees do not need to be covered under a SIMPLEIRA plan. Employees who are covered by a union agreement and whoseretirement benefits were bargained for in good faith by the employees'union and you. Nonresident alien employees who have received no U.S. sourcewages, salaries, or other personal services compensation fromyou. Compensation.Compensation for employees is the total wages required to bereported on Form W-2. Compensation also includes the salaryreduction contributions made under this plan, compensation deferredunder a section 457 plan, and the employees' elective deferrals undera section 401(k) plan, a SARSEP, or a section 403(b) annuity contract.If you are self-employed, compensation is your net earnings fromself-employment (line 4 of Short Schedule SE (Form 1040)) beforesubtracting any contributions made to the SIMPLE IRA plan foryourself. How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLEor Form5305-SIMPLEto set up a SIMPLEIRA plan. Each form is a model savings incentive match plan foremployees (SIMPLE) plan document. Which form you use depends onwhether you select a financial institution or your employees selectthe institution that will receive the contributions. Use Form 5304-SIMPLE if you allow each plan participant toselect the financial institution for receiving his or her SIMPLE IRAplan contributions. Use Form 5305-SIMPLE if you require that allcontributions under the SIMPLE IRA plan be deposited initially at adesignated financial institution. The SIMPLE IRA plan is adopted when you (and the designatedfinancial institution, if any) have completed all appropriate boxesand blanks on the form and you have signed it. Keep the original form.Do not file it with the IRS. Other uses of the forms.If you set up a SIMPLE IRA plan using Form 5304-SIMPLE orForm 5305-SIMPLE, you can use the form to satisfy otherrequirements, including the following. Meeting employer notification requirements for the SIMPLEIRA plan. Page 3 of Form 5304-SIMPLE and Page 3 of Form5305-SIMPLE contain a Model Notification to EligibleEmployees that provides the necessary information to theemployee. Maintaining the SIMPLE IRA plan records and proving you setup a SIMPLE IRA plan for employees. Deadline for setting up a SIMPLE IRA plan.You can set up a SIMPLE IRA plan effective on any date betweenJanuary 1 and October 1 of a year, provided you did not previouslymaintain a SIMPLE IRA plan. If you previously maintained a SIMPLE IRAplan, you can set up a SIMPLE IRA plan effective only on January 1 ofa year. This requirement does not apply if you are a new employer thatcomes into existence after October 1 of the year the SIMPLE IRA planis set up and you set up a SIMPLE IRA plan as soon as administrativelyfeasible after you come into existence. A SIMPLE IRA plan cannot havean effective date that is before the date you actually adopt the plan. Setting up a SIMPLE IRA.SIMPLE IRAs are the individual retirement accounts or annuitiesinto which the contributions are deposited. A SIMPLE IRA must be setup for each eligible employee. Forms 5305-S,SIMPLE IndividualRetirement Trust Account, and 5305-SA,SIMPLE IndividualRetirement Custodial Account, are model trust and custodialaccount documents the participant and the trustee (or custodian) canuse for this purpose. A SIMPLE IRA cannot be designated as a Roth IRA. Contributions to aSIMPLE IRA will not affect the amount an individual can contribute toa Roth IRA. Deadline for setting up a SIMPLE IRA.Zrece reiseA SIMPLE IRA must be set up for an employee before the first dateby which a contribution is required to be deposited into theemployee's IRA. See Time limits for contributing fundslater under Contribution Limits. Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee ofthe following information before the beginning of the election period. The employee's opportunity to make or change a salaryreduction choice under a SIMPLE IRA plan. Your choice to make either reduced matching contributions ornonelective contributions (discussed later). A summary description and the location of the plan. Thefinancial institution should provide you with this information. Written notice that his or her balance can be transferredwithout cost or penalty if you use a designated financialinstitution. Election period.The election period is generally the 60-day period immediatelypreceding January 1 of a calendar year (November 2 to December 31 ofthe preceding calendar year). However, the dates of this period aremodified if you set up a SIMPLE IRA plan in mid-year (for example, onJuly 1) or if the 60-day period falls before the first day an employeebecomes eligible to participate in the SIMPLE IRA plan. A SIMPLE IRA plan can provide longer periods for permittingemployees to enter into salary reduction agreements or to modify prioragreements. For example, a SIMPLE IRA plan can provide a 90-dayelection period instead of the 60-day period. Similarly, in additionto the 60-day period, a SIMPLE IRA plan can provide quarterly electionperiods during the 30 days before each calendar quarter, other thanthe first quarter of each year. Contribution Limits Contributions are made up of salary reduction contributions andemployer contributions. You, as the employer, must make eithermatching contributions or nonelective contributions, defined later. Noother contributions can be made to the SIMPLE IRA plan. Thesecontributions, which you can deduct, must be made timely. SeeTime limits for contributing funds, later. Salary reduction contributions.The amount the employee chooses to have you contribute to a SIMPLEIRA on his or her behalf cannot be more than $6,000 for 2000. Thesecontributions must be expressed as a percentage of the employee'scompensation unless you permit the employee to express them as aspecific dollar amount. You cannot place restrictions on thecontribution amount (such as limiting the contribution percentage),except to comply with the $6,000 limit. If an employee is a participant in any other employer plan duringthe year and has elective salary reductions or deferred compensationunder those plans, the salary reduction contributions under a SIMPLEIRA plan also are elective deferrals that count toward the overall$10,500 annual limit on exclusion of salary reductions and otherelective deferrals. If the other plan is a deferred compensation plan of a state orlocal government or a tax-exempt organization, the limit on electivedeferrals is $8,000. Employer matching contributions.You are generally required to match each employee's salaryreduction contributions on a dollar-for-dollar basis up to 3% of theemployee's compensation. This requirement does not apply if you makenonelective contributions as discussed later. Example.In 2000, your employee, John Rose, earned $25,000 and chose todefer 5% of his salary. You make a 3% matching contribution. The totalcontribution you can make for John is $2,000, figured as follows. Salary reduction contributions($25,000 .05) $1,250 Employer matching contribution($25,000 .03)        750 Total contributions $2,000 Lower percentage.If you choose a matching contribution less than 3%, the percentagemust be at least 1%. You must notify the employees of the lower matchwithin a reasonable period of time before the 60-day election period(discussed earlier) for the calendar year. You cannot choose apercentage less than 3% for more than 2 years during the 5-year periodthat ends with (and includes) the year for which the choice iseffective. Nonelective contributions.Instead of matching contributions, you can choose to makenonelective contributions of 2% of compensation on behalf of eacheligible employee who has at least $5,000 of compensation (or somelower amount of compensation that you select) from you for the year.If you make this choice, you must make nonelective contributionswhether or not the employee chooses to make salary reductioncontributions. Only $170,000 of the employee's compensation can betaken into account to figure the contribution limit. If you choose this 2% contribution formula, you must notify theemployees within a reasonable period of time before the 60-dayelection period (discussed earlier) for the calendar year. Example 1.In 2000, your employee, Jane Wood, earned $36,000 and chose to haveyou contribute 10% of her salary. You make a 2% nonelectivecontribution. The total contributions you can make for her are $4,320,figured as follows. Salary reduction contributions($36,000 .10) $3,600 2% nonelective contributions($36,000 .02)        720 Total contributions $4,320 Example 2.Using the same facts as in Example 1, above, the maximumcontribution you can make for Jane if she earned $75,000 is $7,500,figured as follows. Salary reduction contributions(maximum amount) $6,000 2% nonelective contributions($75,000 .02)      1,500 Total contributions $7,500 Time limits for contributing funds.You must make the salary reduction contributions to the SIMPLE IRAwithin 30 days after the end of the month in which the amounts wouldotherwise have been payable to the employee in cash. You must makematching contributions or nonelective contributions by the due date(including extensions) for filing your federal income tax return forthe year. When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year with orwithin which the calendar year for which contributions were made ends.You can deduct contributions for a particular tax year if they aremade for that tax year and are made by the due date (includingextensions) of your federal income tax return for that year. Example 1.Your tax year is the fiscal year ending June 30. Contributionsunder a SIMPLE IRA plan for the calendar year 2000 (includingcontributions made in 2000 before July 1, 2000) are deductible in thetax year ending June 30, 2001. Example 2.You are a sole proprietor whose tax year is the calendar year.Contributions under a SIMPLE IRA plan for the calendar year 2000(including contributions made in 2001 by April 16, 2001) aredeductible in the 2000 tax year. Where To Deduct Contributions Deduct contributions you make for your common-law employees on yourtax return. For example, sole proprietors deduct them on Schedule C(Form 1040) or Schedule F (Form 1040), partnerships deduct them onForm 1065, and corporations deduct them on Form 1120, Form1120-A, or Form 1120S. Sole proprietors and partners deduct contributions for themselveson line 29 of Form 1040. (If you are a partner, contributions foryourself are shown on the Schedule K-1 (Form 1065) you receivefrom the partnership). Tax Treatment of Contributions You can deduct your contributions and your employees can excludethese contributions from their gross income. SIMPLE IRA contributionsare not subject to federal income tax withholding. However, salaryreduction contributions are subject to social security, Medicare, andfederal unemployment (FUTA) taxes. Matching and nonelectivecontributions are not subject to these taxes. Reporting on Form W-2.Do not include SIMPLE IRA contributions in the "Wages, tips,other compensation" box of Form W-2. However, salaryreduction contributions must be included in the boxes for socialsecurity and Medicare wages. Also include the proper code in Box 13.For more information, see the instructions for Forms W-2 andW-3. Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules andgenerally are includible in income for the year received. Tax-freerollovers can be made from one SIMPLE IRA into another SIMPLE IRA. Arollover from a SIMPLE IRA to another IRA can be made tax free onlyafter a 2-year participation in the SIMPLE IRA plan. Early withdrawals generally are subject to a 10% additional tax.However, the additional tax is increased to 25% if funds are withdrawnwithin 2 years of beginning participation. More information.See Publication 590 for information about IRA rules, includingthose on the tax treatment of distributions, rollovers, requireddistributions, and income tax withholding. More Informationon SIMPLE IRA Plans If you need more help to set up and maintain a SIMPLE IRA plan, seethe following IRS notice and revenue procedure. Notice 98-4.This notice contains questions and answers about the implementationand operation of SIMPLE IRA plans, including the election and noticerequirements for these plans. Notice 98-4 is in CumulativeBulletin 1998-1. Revenue Procedure 97-29.This revenue procedure provides guidance to drafters of prototypeSIMPLE IRAs on obtaining opinion letters. Revenue Procedure97-29 is in Cumulative Bulletin 1997-1.