SIMPLE IRA

A SIMPLE IRA is a type of tax-advantaged employer-provided retirement plan that allows employees to set aside money and invest it for retirement.  It is an employer sponsored plan, like more well-known plans such as the 401(k) and 403(b), but offers simpler and less costly administration rules. Like a 401(k) plan, the SIMPLE IRA is funded by a pretax salary reduction. Like other salary reduction contributions, these deductions are subject to social security, medicare, and FUTA taxes.

Eligible employers

Businesses with 100 or fewer employees, including state and local governments and tax-exempt organizations, are eligible for SIMPLE IRAs.

Advantages

SIMPLE IRAs allow tax-deferred contributions for participants, flexible employer contributions and minimal paperwork and tax filing.  For plan participants, SIMPLE IRAs provide creditor protection at both the federal and state levels.

Eligible employees

Any employee who earns $5,000 during any two preceding years and who is expected to earn $5,000 in the current year is eligible; certain employees can be excluded. The employer may also specify less restrictive eligibility requirements on the SIMPLE adoption agreement to expand the group of employees who are eligible.

Employer contributions

  • may be changed annually
  • minimum contribution required for all eligible employees earning at least $5,000 during the year:
    • dollar-for-dollar match up to 3% of pay (see Examples 1–3 below) — may be reduced to as low as 1% for two of every five years

    OR 

    • 2% of gross pay
  • For 2010, $28,000 is the maximum annual allocation to a participant’s account ($11,500 deferral, plus $11,500 maximum match; $2,500 catch-up contribution and $2,500 matching contribution, if applicable). Limited to 3% of compensation.
  • All employer and participant contributions are immediately vested.

Participant deferrals

  • For 2010, the maximum annual participant deferral is $11,500; the maximum annual participant deferral for those age 50 or older is $14,000.
  • The participant controls the distributions.
  • All employer and participant contributions are immediately vested.

Taxes and testing

  • Employer contributions not subject to Social Security/Medicare (FICA) or Federal Unemployment (FUTA).
  • Participant deferrals and earnings grow tax-free until withdrawn at retirement.
    • Deferrals are reported on W-2 forms.
    • Deferrals are subject to FICA, FUTA and Railroad Retirement Tax (RRTA).
  • No top-heavy1, ADP, ACP or 415 testing required.
  • No 5500 reporting required.

Fiduciary responsibility

Fiduciaries have limited liability since Individual Retirement Accounts (IRAs) are set up for each eligible employee, and participants control their own investment choices.

The above information is general in nature and is not intended as legal or tax advice. Along with our help, you should seek the advice of your tax consultant and/or attorney.

1A plan is top-heavy if, on the determination date, the total value of the accounts of all key employees is greater than 60% of the total value of the accounts of all employees.