- Employer is required to contribute each year either a:
- Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
- 2% nonelective contribution for each eligible employee
- Under the "nonelective" contribution formula, even if an eligible employee doesn't contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $345,000 for 2024; $330,000 for 2023; $305,000 for 2022; $290,000 for 2021; $285,000 for 2020 (subject to cost-of-living adjustments in later years)
How does a SIMPLE IRA Plan work?
Example 1:
Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE IRA plan for its employees and will match its employees' contributions dollar-for-dollar up to 3% of each employee's compensation. Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution.
Elizabeth has a yearly compensation of $50,000 and contributes 5% of her compensation ($2,500) to her SIMPLE IRA. The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth's SIMPLE IRA that year is $4,000 (her $2,500 contribution plus Rockland's $1,500 contribution). The financial institution holding Elizabeth's SIMPLE IRA has several investment choices and she is free to choose which ones suit her best.
Example 2:
Austin works for the Skidmore Tire Company, a small business with 75 employees. Skidmore has a SIMPLE IRA plan for its employees and will make a 2% nonelective contribution for each of them. Under this option, even if a Skidmore employee does not contribute to his or her SIMPLE IRA, that employee would still receive an employer contribution to his or her SIMPLE IRA equal to 2% of compensation.
Austin's annual compensation is $40,000. Even if Austin does not contribute this year, Skidmore must still make a contribution of $800 (2% of $40,000).
Pros and Cons:
- Easy and inexpensive to set up and operate
- Employees share responsibility for their retirement
- No discrimination testing required
- Inflexible contributions
- Lower contribution limits than some other retirement plans
Who Contributes: Employer must contribute and employee may contribute.
Contribution Limits: Total contributions to each employee's SIMPLE IRA are limited.
Filing Requirements: An employer generally has no filing requirements.
Participant Loans: Not permitted. The assets may not be used as collateral.
In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59-1/2. Also, if withdrawals are made within the first two years of participation, the 10% additional tax is increased to 25%.
Establish a SIMPLE IRA plan
Starting a SIMPLE IRA plan is easy to do!
Choosing a financial institution
You'll need to choose a financial institution to serve as trustee of the SIMPLE IRAs to hold each employee's/participant's retirement plan assets. These accounts will receive the contributions you make to the plan. Alternatively, you can decide to let employees choose the financial institution that will receive their contributions.
Three steps to set up a SIMPLE IRA plan
There are three steps to establishing a SIMPLE IRA plan.
- Execute a written agreement to provide benefits to all eligible employees
- Give employees certain information about the agreement
- Set up an IRA account for each employee
Execute a written agreement
You can use Form 5304-SIMPLE PDF or Form 5305-SIMPLE PDF to set up a SIMPLE IRA plan. Each form is a model Savings Incentive Match Plan for Employees (SIMPLE) plan document.
- Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions.
- Use Form 5305-SIMPLE if you will deposit all SIMPLE IRA plan contributions at an employer-designated financial institution.
You adopt the SIMPLE IRA plan when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Keep the original form. Do not file it with the IRS.
Alternatively, you may use a prototype document. A mutual fund, insurance company, bank or other qualified institution usually provides these. You may also have an individually designed plan.
Annual notice to eligible employees
You must notify each employee before the beginning of the election period of:
- The employee's opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
- The employees' ability to select a financial institution that will serve as trustee of the employees' SIMPLE IRA, if applicable;
- Your decision to make either matching contributions or nonelective contributions;
- A summary description (the financial institution should provide this information); and
- Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.
The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31). However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.
If you set up your SIMPLE IRA plan using either Form 5304-SIMPLE or Form 5305-SIMPLE, you can give each employee a copy of the signed forms to satisfy the notification requirement.
Set up a SIMPLE IRA for each eligible employee
A SIMPLE IRA must be set up by or for each eligible employee and all contributions to the plan must go to it.
A SIMPLE IRA cannot be a Roth IRA.
Financial institutions authorized to hold and invest SIMPLE IRA plan contributions include banks, savings and loan associations, insurance companies, certain regulated investment companies, federally insured credit unions and brokerage firms. SIMPLE IRA plan contributions can be put into stocks, mutual funds and other similar types of investments. The investment options available at the institution where the SIMPLE IRA is located will determine what kinds of investment choices are available to the employee as he or she makes decisions about investing his or her SIMPLE IRA accounts.
You and your employees will receive a statement from the financial institutions investing your SIMPLE IRA plan contributions both at the time you make the first SIMPLE IRA plan contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SIMPLE IRA assets.
Timing of setting up a SIMPLE IRA plan
You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan.
"Why SEP or SIMPLE IRAs are Hassle-free Retirement Plans" video - a discussion on two types of retirement plans (SEP and SIMPLE IRA) that are tailored for many businesses.
Participate in a SIMPLE IRA plan
An employee (including a self-employed individual) who:
- earned at least $5,000 in compensation during any 2 years before the current calendar year and
- expects to receive at least $5,000 during the current calendar year.
An employer can use less restrictive participation requirements, but not more restrictive ones. For example, an employer can eliminate or reduce the prior or current year compensation amounts. Employers cannot impose any other conditions for participating in a SIMPLE IRA plan.
Example: Employer A allows participation for employees who received at least $3,000 in compensation during any preceding calendar year.
An employer can exclude the following employees from a SIMPLE IRA plan:
- Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and the employer
- Nonresident alien employees who do not have U.S. wages, salaries or other personal services compensation from the employer
Operate and maintain a SIMPLE IRA plan
Generally, your plan should include any employee who received at least $5,000 in compensation from you during any two preceding calendar years and is expected to receive at least $5,000 in compensation in the current calendar year. See the participation rules for details.
What are the contribution rules?
SIMPLE IRAs hold the contributions made for each eligible employee. A SIMPLE IRA is funded by:
- For 2024, annual employee salary reduction contributions (elective deferrals)
- Limited to $16,000*
- For employees age 50 or over, a $3,500 “catch-up” contributions is also allowed*
- Limited to $15,500*
- For employees age 50 or over, a $3,500 “catch-up” contributions is also allowed*
- Limited to $14,000*
- For employees age 50 or over, a $3,000 “catch-up” contributions is also allowed*
- limited to $13,500*
- For employees age 50 or over, a $3,000 "catch-up" contribution is also allowed*
- limited to $13,000*
- For employees age 50 or over, a $3,000 "catch-up" contribution is also allowed*
- 2% nonelective contribution - 2% of each eligible employee's compensation regardless of whether or how much the employee deferred, or
- 3% matching contribution - match of employee's elective deferrals on a dollar-for-dollar basis up to 3% of the employee's compensation.
- May reduce the 3% limit to a lower percentage, but in any event, not lower than 1%. May not lower the 3% limit for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective.
* Each employee's total contributions are limited and subject to annual cost-of-living-adjustments. If you miscalculated a participant's contribution, find out how you can correct this mistake.
When making employer contributions, you must follow the definition of compensation stated in the plan document. Compensation generally includes the pay a participant received from you for personal services for a year. If you used the wrong compensation to calculate a participant's deferrals or employer contributions, find out how you can correct this mistake.
Automatic Enrollment: A plan feature allowing an employer to automatically deduct a fixed percentage or amount from an employee's wages and contribute that to the SIMPLE IRA plan unless the employee has affirmatively chosen to contribute nothing or to contribute a different amount. These automatic enrollment contributions qualify as elective deferrals.
Annual Election Period: Each year employees can change their contribution levels during the plan's election period. This election period must be at least 60 days long, and employees must receive prior notice about an upcoming election opportunity. SIMPLE IRA plans must have an annual election period extending from November 2 to December 31. A plan can have more election periods each year in addition to this 60-day election period.
When employees want to stop contributions
Employees may elect to terminate their salary reduction contributions to a SIMPLE IRA plan at any time. If they do so, the SIMPLE IRA plan may preclude them from resuming salary reduction contributions until the beginning of the next calendar year. Employers that are making nonelective employer contributions must continue to make them on behalf of these employees.
Where are contributions deposited?
After you send the SIMPLE IRA plan contributions to the financial institution you selected, that institution will manage the funds. Employees can move their SIMPLE IRA assets from one SIMPLE IRA to another. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds, and similar types of investments. Each employee makes the investment decisions for his or her own account.
You will need to give each participating employee an annual statement indicating the amount contributed to his/her account for the year.
When must contributions be deposited?
- Employee salary reduction contributions - within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee (including self-employed individuals) in cash
- Employer matching or nonelective contributions - by the due date (including extensions) for filing your federal income tax return for the year
If you haven't deposited contributions by their due date, find out how you can correct this mistake.
Who owns SIMPLE IRA contributions?
Contributions to SIMPLE IRA accounts are always 100 percent vested, or owned, by the employee.
What information do I need to give to my employees?
Before the beginning of each annual election period, you must notify each employee of:
- The employee's opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
- The employees' ability to select a financial institution that will serve as trustee of the employees' SIMPLE IRA, if applicable;
- Your decision to make either matching contributions or nonelective contributions;
- A summary description (the financial institution should provide this information); and
- Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.
If you haven't timely given your employees the notice, find out how you can correct this mistake.
The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31). However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.
If you set up your SIMPLE IRA plan using either Form 5304-SIMPLE or Form 5305-SIMPLE, you can give each employee a copy of the signed forms to satisfy the notification requirement.
If the deferral limitations aren't released timely and you normally include the deferral amount for the upcoming year in your notice, you can mention the current limit and advise participants to check the COLA Increase table for next year's amount. The notice isn't required to include the salary deferral limitation for the upcoming year.
What are the basic withdrawal rules?
SIMPLE IRA contributions and earnings can be withdrawn at any time, subject to the general limitations imposed on traditional IRAs. A withdrawal is taxable in the year received. If a participant makes a withdrawal before he or she attains age 59 ½, generally a 10% additional tax applies. If this withdrawal occurs within the first 2 years of participation, the 10% tax is increased to 25%.
A participant who withdraws funds from a SIMPLE IRA may continue to participate in the employer's SIMPLE IRA plan.
SIMPLE IRA contributions and earnings must eventually be distributed following the IRA required minimum distribution rules.
Rollovers
SIMPLE IRA contributions and earnings may be rolled over PDF tax-free from one SIMPLE IRA to another. A tax-free rollover may also be made from a SIMPLE IRA to an IRA that is not a SIMPLE IRA, but only after 2 years of participation in the SIMPLE IRA plan.
Participant loans
Loans are not permitted. However, SIMPLE IRA accounts are IRAs and withdrawals may be possible. See the IRA FAQs.
What are the filing and notice requirements?
Filing requirements: An employer generally has no filing requirements and does not need to file an annual Form 5500 return.
W-2 Reporting: SIMPLE IRA contributions are not included in the "Wages, tips, other compensation" box of Form W-2, Wage and Tax Statement PDF , but check the Retirement Plan box in box 13. For more information, see the instructions for Forms W-2 and W-3 PDF . Salary reduction contributions must be included in the boxes for Social Security and Medicare wages.
SIMPLE IRA contributions are not subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Matching and nonelective contributions are not subject to these taxes.
Reporting employer deductions of contributions. The employer can deduct its contributions to a SIMPLE IRA plan.
- Sole proprietors may deduct SIMPLE IRA contributions for employees on Schedule C (Form 1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming.
- Partnerships deduct contributions for employees on Form1065, U.S. Return of Partnership Income.
- Sole proprietors and partners may deduct contributions for themselves on Form 1040, U.S. Individual Income Tax Return. (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., you get from the partnership).
- Corporations deduct contributions on Form 1120, U.S. Corporation Income Tax Return, Form 1120-A, U.S. Corporation Short-Form Income Tax Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.
How can I tell if my plan is operating within the rules?
You should conduct an annual self-audit to help determine whether your SIMPLE IRA plan is operating within the rules. Checklists and tips are available to help with periodic reviews of your plan.
Correct SIMPLE IRA plan errors
Find, fix and avoid plan errors
Terminate a SIMPLE IRA plan
Other than the first year you set up your plan, SIMPLE IRA plans must be maintained for a whole calendar year. Once started, you must continue your SIMPLE IRA plan for the entire calendar year, funding all contributions promised in the employee notice.
If you decide your SIMPLE IRA plan no longer suits your business, consult with your financial institution to determine if another type of retirement plan might be a better match.
How do I terminate my SIMPLE IRA plan?
Step 1: Notify your employees within a reasonable time before November 2 that you'll discontinue the SIMPLE IRA plan effective the following January 1.
Step 2: Notify your SIMPLE IRA plan's financial institution and payroll provider that you won't be making SIMPLE IRA contributions for the next calendar year and that you want to terminate your contributions.
Step 3: You should keep records of your actions, but you don't need to notify the IRS that you have terminated the SIMPLE IRA plan.
Example: Acme Company decided on November 18, 2014, to terminate its SIMPLE IRA plan as soon as possible. The earliest effective date for the termination is January 1, 2016. Acme must notify its employees before November 2, 2015, that it won't sponsor a SIMPLE IRA plan for 2016.
Can I terminate or amend my SIMPLE IRA plan in the middle of the year?
No, you cannot end your plan in the middle of the calendar year. Once started, you must continue your SIMPLE IRA plan for the entire calendar year, funding all contributions promised in the employee notice.
Related
Forms, publications, frequently asked questions, etc.
