Publication 590, Individual Retirement Arrangements (IRAs); Chapter 5 - Savings Incentive Match Plans for Employees (SIMPLE), How Much Can Be Contributed on My Behalf?

V. Preparing Your Tax Return(s) and Information Returns

XI. Alerts and Tutorials

Update

How Much Can Be Contributed on My Behalf?
The limits on contributions to a SIMPLE IRA vary with the type ofcontribution that is made.
Salary reduction contributions.For 1999, salary reduction contributions (employee-chosencontributions) that your employer can make on your behalf under aSIMPLE plan are limited to $6,000.
Caution:
If you are a participant in any other employer plans during theyear and you have elective salary reductions or deferred compensationunder those plans, the salary reduction contributions under the SIMPLEplan also are included in the $10,000 annual limit on exclusions ofsalary reductions and other elective 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.
You, not your employer, are responsible for monitoring compliancewith these limits.
Matching employer contributions.Generally, your employer must make matching contributions to yourSIMPLE IRA in an amount equal to your salary reduction contributions.These matching contributions cannot be more than 3% of yourcompensation for the calendar year. See Matching contributionsless than 3%, later.
Example 1.In 1999, Joshua was a participant in his employer's SIMPLE plan.His compensation, before SIMPLE plan contributions, was $41,600, or$800 per week. Instead of taking it all in cash, Joshua elected tohave 12.5% of his weekly pay ($100) contributed to his SIMPLEIRA. For the full year, Joshua's salary reduction contributions were$5,200, which is less than the $6,000 limit on these contributions.
Under the plan, Joshua's employer was required to make matchingcontributions to Joshua's SIMPLE IRA. Because the employer's matchingcontributions must equal Joshua's salary reductions, but cannot bemore than 3% of his compensation (before salary reductions) forthe year, his employer's matching contribution was limited to $1,248(3% of $41,600).
Example 2.Valkenburg cheap hotelsAssume the same facts as in Example 1, except thatJoshua's compensation for the year was $240,000 and he chose to have2.5% of his weekly pay contributed to his SIMPLE IRA. In thisexample, Joshua's salary reduction contributions for the year(2.5% times $240,000) were equal to the 1999 limit for salaryreduction contributions ($6,000). Because 3% of Joshua'scompensation ($7,200) is more than the amount the employer wasrequired to match ($6,000), the employer's matching contributions werelimited to $6,000. In this example, total contributions made onJoshua's behalf for the year were $12,000, the maximum contributionspermitted under a SIMPLE plan for 1999.
Matching contributions less than 3%.Your employer can reduce the 3% limit on matching contributions fora calendar year, but only if:
The limit is not reduced below 1%,
The limit is not reduced for more than 2 years out of the5-year period that ends with (and includes) the year for which theelection is effective, and
Employees are notified of the reduced limit within areasonable period of time before the 60-day election period duringwhich they can enter into salary reduction agreements.
For purposes of applying the rule in item (2) in determiningwhether the limit was reduced below 3% for the year, any year beforethe first year in which your employer (or a predecessor employer)maintains a SIMPLE IRA plan will be treated as a year for which thelimit was 3%. If your employer chooses to make non-electivecontributions for a year (discussed next), that year also will betreated as a year for which the limit was 3%.
Nonelective employer contributions.If your employer chooses to make nonelective contributions, insteadof matching contributions, to each eligible employee's SIMPLE IRA,contributions must be 2% of your compensation for the entireyear. For 1999, only $160,000 of your compensation can be taken intoaccount to figure the contribution limit.
Your employer can substitute the 2% nonelective contribution forthe matching contribution for a year, only if:
Eligible employees are notified that a 2% nonelectivecontribution will be made instead of a matching contribution, and
This notice is provided within a reasonable period duringwhich employees can enter into salary reduction agreements.
Example 3.Assume the same facts as in Example 2, except thatJoshua's employer chose to make non-elective contributions instead ofmatching contributions. Because the employer's nonelectivecontributions are limited to 2% of up to $160,000 of Joshua'scompensation, the employer's contribution to Joshua's SIMPLE IRA waslimited to $3,200 for 1999. In this example, total contributions madeon Joshua's behalf for the year were $9,200 (Joshua's salaryreductions of $6,000 plus the employer's contribution of $3,200).