Table of Contents
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- SIMPLE IRA Plan
- Who Can Set Up a SIMPLE IRA Plan?
- Who Can Participate in a SIMPLE IRA Plan?
- How To Set Up a SIMPLE IRA Plan
- Notification Requirement
- Contribution Limits
- When To Deduct Contributions
- Where To Deduct Contributions
- Tax Treatment of Contributions
- Distributions (Withdrawals)
- More Information on SIMPLE IRA Plans
- SIMPLE 401(k) Plan
Forms (and Instructions)
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W-2
Wage and Tax Statement -
5304-SIMPLE
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)-Not for Use With a Designated Financial Institution -
5305-SIMPLE
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)-for Use With a Designated Financial Institution
A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective 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.
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Using SIMPLE IRAs (SIMPLE IRA plan).
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As part of a 401(k) plan (SIMPLE 401(k) plan).
A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan, later.
You can set up a SIMPLE IRA plan if you meet both the following requirements.
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You meet the employee limit.
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You do not maintain another qualified plan unless the other plan is for collective bargaining employees.
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Coverage under the plan has not significantly changed during the grace period.
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The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer.
![Caution](https://webarchive.library.unt.edu/eot2008/20081005013908im_/http://www.irs.gov/publications/images/caution.gif)
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Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.
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Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.
You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Each form is a model savings incentive match plan for employees (SIMPLE) plan document. Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions.
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 require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution.
The SIMPLE IRA plan is adopted 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.
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Meeting employer notification requirements for the SIMPLE IRA plan. Page 3 of Form 5304-SIMPLE and Page 3 of Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee.
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Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees.
If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period.
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The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.
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Your choice to make either matching contributions or nonelective contributions (discussed later).
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A summary description provided by the financial institution.
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Written notice that his or her balance can be transferred without cost or penalty if you use a designated financial institution.
Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching contributions or nonelective contributions, defined later. No other contributions can be made to the SIMPLE IRA plan. These contributions, which you can deduct, must be made timely. See Time limits for contributing funds, later.
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The catch-up contribution limit.
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The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.
Example.
In 2007, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make 3% matching contributions. The total contribution 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 |
The total contribution you can make for yourself is $5,200, figured as follows.
Salary reduction contributions
($40,000 × .10) |
$4,000 |
Employer matching contribution
($40,000 × .03) |
1,200 |
Total contributions | $5,200 |
Example 1.
In 2007, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective contribution. Both of you are under age 50. The total contribution you can make for Jane is $4,320, figured as follows.
Salary reduction contributions
($36,000 × .10) |
$3,600 |
2% nonelective contributions
($36,000 × .02) |
720 |
Total contributions | $4,320 |
The total contribution you can make for yourself is $6,000, figured as follows.
Salary reduction contributions
($50,000 × .10) |
$5,000 |
2% nonelective contributions
($50,000 × .02) |
1,000 |
Total contributions | $6,000 |
Example 2.
Using the same facts as in Example 1, above, the maximum contribution you can make for Jane or for yourself if you each earned $75,000 is $12,000, figured as follows.
Salary reduction contributions
(maximum amount allowed) |
$10,500 |
2% nonelective contributions
($75,000 × .02) |
1,500 |
Total contributions | $12,000 |
You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year.
Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of Partnership Income; and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120S, U.S. Income Tax Return for an S Corporation.
Sole proprietors and partners deduct contributions for themselves on line 28 of 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, Deductions, Credits, etc., you get from the partnership.)
You can deduct your contributions and your employees can exclude these contributions from their gross income. SIMPLE IRA plan 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.
Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after 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 withdrawn within 2 years of beginning participation.
If you need more help to set up and maintain SIMPLE IRA plans, see the following IRS notice.
You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4. However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules in that discussion if the plan meets the conditions listed below.
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Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $10,500 for 2007. If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2007 and 2008. See Catch-up contributions, earlier under Contribution Limits.
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You must make either:
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Matching contributions up to 3% of compensation for the year, or
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Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year.
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No other contributions can be made to the trust.
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No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan of the employer on behalf of any employee eligible to participate in the SIMPLE 401(k) plan.
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The employee's rights to any contributions are nonforfeitable.
No more than $225,000 of the employee's compensation can be taken into account in figuring salary reduction contributions, matching contributions, and nonelective contributions.
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