SIMPLE Retirement Plan

A SIMPLE plan (Savings Incentive Match Plan for Employees) is a written salary reduction arrangement that allows a small business (an employer with 100 or fewer employees) to make elective contributions to a SIMPLE retirement account on behalf of each eligible employee. An eligible employer (defined later) is generally not allowed to maintain another 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 able to 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 of the employer to which contributions are made, or benefits are accrued, for service in any year beginning with the year the SIMPLE plan becomes effective.

Contributions to a SIMPLE plan are deductible by the employer and excluded from the gross income of the employee.

Definitions

SIMPLE retirement account. The SIMPLE retirement account of an eligible employee is an individual retirement plan that can be either an individual retirement account or an individual retirement annuity, as described in Publication 590. Employees' rights to the contributions cannot be forfeited.

A SIMPLE plan can also be set up as a 401(k) plan. See Publication 560 for 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 the employer make contributions (elective deferrals) to a SIMPLE retirement account on his or her behalf. An eligible employee may also stop making elective deferrals at any time during the year. The employer must match the employee's contributions or make nonelective contributions. No other types of contributions are allowed under a qualified salary reduction arrangement.

Eligible employer. Any employer who has 100 or fewer eligible employees in any year and does not maintain another employer-sponsored retirement plan can set up a SIMPLE plan.

Eligible employee.hôtels Benidorm Any employee who receives at least $5,000 in compensation during any 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 employer make contributions to a SIMPLE retirement account under a qualified salary reduction arrangement.

Compensation. Compensation is the total wages required to be reported on Form W-2 plus elective deferrals. For a self-employed individual, compensation is net earnings from self-employment. It does not include any contribution made to the SIMPLE plan.

TaxTip:

Any SIMPLE elective deferrals made for an employee under a salary reduction arrangement are included in wages on the employee's Form W-2 for social security and Medicare tax purposes only.

Contribution Limits

Contributions include employee elective deferrals and employer contributions. The employer must satisfy one of two contribution formulas: the matching contribution formula or a 2% nonelective contribution. No other contributions can be made to the SIMPLE plan. These contributions, which are deductible by the employer, must be made timely.

Hamburg luxury hotelsEmployee elective deferral limit. The amount that the employee chooses to have the employer contribute to a SIMPLE retirement account on his or her behalf (elective deferrals) must not exceed $6,000 for any year and must be expressed as a percentage of the employee's compensation.

Dollar-for-dollar employer matching contributions. The employer must match all eligible employees' elective contributions on a dollar-for-dollar basis, up to 3% of the employee's compensation.

Caution:

If the employer chooses a matching contribution of less than 3%, the percentage cannot be less than 1%. The employer must notify the employee of the lower percentage within a reasonable time before the 60-day election period for the calendar year. A percentage of less than 3% cannot be chosen for more than 2 years during a 5-year period.

Nonelective contributions. In place of the dollar-for-dollar matching contributions, the employer can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee. Only $160,000 of the employee's compensation can be taken into account when figuring the contribution limit.

Caution:

An employer who chooses the 2% contribution formula, must timely notify the employee (within the 60-day election period described earlier).

Time limits for contributing funds. The employer must make the contribution to the SIMPLE account within 30 days after the end of the month for which the payments to the employee were deferred. The employer's matching contributions must be made by the due date of the tax return, including extensions, for the year.

Distributions (Withdrawals)

Distributions from a SIMPLE retirement account are subject to the IRA rules and are generally includible in income when withdrawn. Tax-free rollovers can be made from one SIMPLE account into another SIMPLE account or into an IRA. Early withdrawals generally are subject to a 10% (or 25%) additional tax.

Exceptions. A rollover to an IRA can be made tax free only after participating 2 years in the SIMPLE plan. A 25% additional tax for early withdrawal applies if funds are withdrawn within 2 years of beginning participation.

Employee notification.accommodation reservation Kirchberg in Tirol The employer must notify each eligible employee of his or her opportunity to make contributions under a SIMPLE plan. The employer must also notify all eligible employees of the contribution alternative that was chosen. This information must be provided before the beginning of the employee's 60-day election period.

More information. This chapter does not cover all the rules and exceptions that apply to a SIMPLE IRA or a SIMPLE 401(k) plan. See Publication 560 for additional information on excludable employees, reporting and disclosure requirements, and other rules. See Form 5304-SIMPLE or Form 5305-SIMPLE and their instructions, also.

See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding.