A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan offers great advantages for businesses that meet two basic criteria.
If you are among the thousands of business owners eligible for a SIMPLE IRA plan, read on.
A SIMPLE IRA plan provides you and your employees with an easy way to contribute toward retirement. It reduces taxes and also helps you attract and retain quality employees. Plus, compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs. In short, they are just simpler to operate.
Step 1: Contact a retirement plan professional or a representative of a financial institution that offers retirement plans. Many financial institutions will have a pre-approved SIMPLE IRA plan form that you can review.
Step 2: Choose a financial institution to maintain employees' SIMPLE IRAs. This is one of the most important decisions you will make because that entity becomes a trustee to the plan. (Alternatively, you can let employees choose the financial institution that will receive their contributions.)
Regardless of who makes the choice, only the following institutions can be designated as trustees or custodians for SIMPLE IRA plans:
Trustees work with employers and agree to receive and invest contributions and give the employer a summary description of the plan features each year.
Step 3: Choose a plan document from your financial institution. If your financial institution offers a model SIMPLE IRA plan document, you will have a choice of two forms to use:
Your selected plan document will set out which of your employees are covered. You can choose to cover all employees without restriction. Alternatively, you can limit the employees covered to those who received at least $5,000 in compensation during any 2 years prior to the current calendar year and who are reasonably expected to receive at least $5,000 during the current calendar year.
Step 4: Complete and sign the selected IRS form (or other plan document, if not using the IRS model form). This document becomes the plan's basic legal document, describing your employees' rights and benefits. Do not send it to the IRS. Instead, use it as a reference, as it sets out the plan terms (for example, eligible employees, compensation, and employer contributions). You will need to ensure that your plan is current with the law.
It's easy to operate a SIMPLE IRA plan.
Participants are employees who choose to contribute or to whose accounts you deposit contributions. You must provide information about those employees to your financial institution. Inform your financial institution of any changes in the status of eligible employees (for example, new employees).
SIMPLE IRA plans operate on a calendar-year basis. An employer may initially set up a SIMPLE IRA plan as late as October 1.
You must set up a SIMPLE IRA for each employee with contributions under the plan.
Employees must receive notice of their right to participate, to make salary reduction contributions, and to receive employer contributions. In addition, you (or the trustee) must give employees information about the plan, including a copy of the summary description. The required notice also informs eligible employees of the plan's election period, which is when they can decide to contribute to the plan. For employers that use one of the model forms, page 3 of both Form 5304-SIMPLE and Form 5305-SIMPLE have a model notice.
If the plan offers automatic enrollment, you can choose to automatically enroll employees in the SIMPLE IRA plan as long as the employees are allowed to opt out or change the amount of salary reduction contributions.
Employees can make salary reduction contributions to a SIMPLE IRA plan in any amount up to the legal limits. The maximum amount that an employee can contribute is adjusted annually for cost-of-living increases. The limit is $14,000 in 2022 and $15,500 in 2023. Employees 50 or older can make additional employee contributions (known as catch-up contributions) up to $3,000 in 2022 and $3,500 in 2023. These amounts also are adjusted annually for cost-of-living increases.
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 the upcoming opportunity. SIMPLE IRA plans that have already been established must have an annual election period that extends from November 2 to December 31. A plan can have more election periods each year in addition to this 60-day election period.
You have two choices in determining your contributions to the SIMPLE IRA plan. You can choose to make:
Each year, you can choose which one you will use for the next year's contributions. This choice is part of the information you are required to communicate to employees before the 60-day election period.
You and your employees also can roll over amounts from a qualified employer-sponsored retirement plan or an IRA into a SIMPLE retirement account. During the first 2 years of participation in a SIMPLE IRA plan, you may roll over amounts from another SIMPLE retirement account. After 2 years of participation, you also may roll over amounts from a qualified retirement plan or an IRA.
You (or the trustee) must deposit employee contributions in the financial institution serving as trustee for the plan as soon as reasonably possible, but no later than 30 days after the end of the month in which the amounts would otherwise have been payable to the employee.
For plans with fewer than 100 participants, employers can deposit salary reduction contributions with the plan no later than the 7th business day after withholding it to be considered in compliance with the law. You must make your employer contributions by the due date for filing your business's Federal income tax return for the year (including extensions, if applicable).
After forwarding the SIMPLE IRA plan contributions to the trustee, the trustee will invest the funds. In many cases, the funds are invested at the direction of the participants. SIMPLE IRAs can be invested in stocks, bonds, mutual funds, and similar types of investments.
Employee and employer contributions are always 100 percent vested, meaning an employee has a right to the money they put aside plus employer contributions and earnings from investments.
Employees can move their SIMPLE IRA assets from one SIMPLE IRA plan to another in accordance with the procedures of the financial institution.
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 each employee's contributions dollar-for-dollar up to 3 percent of the employee's salary. Under this option, if a Rockland employee does not contribute to their SIMPLE IRA, then that employee does not receive any employer contributions from Rockland.
Elizabeth has a yearly salary of $50,000. If she contributes 5 percent of her salary to her SIMPLE IRA, Elizabeth's yearly contribution will be $2,500. The Rockland matching contribution will be $1,500 (3 percent of her salary). So, the total contribution to Elizabeth's SIMPLE IRA that year will be $4,000 (her $2,500 contribution plus the $1,500 contribution from Rockland). The financial institution holding Elizabeth's SIMPLE IRA has several investment choices, and Elizabeth 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 decided to establish a SIMPLE IRA plan for its employees and will make a 2 percent nonelective contribution for each of them. Under this option, even if an eligible Skidmore employee does not contribute to their SIMPLE IRA, that employee would still receive an employer nonelective contribution to their SIMPLE IRA equal to 2 percent of their salary.
Austin has a yearly salary of $40,000 and has decided that this year he simply cannot contribute to his SIMPLE IRA. Even though Austin will not contribute this year, Skidmore makes a nonelective contribution of $800 (2 percent of $40,000). The financial institution holding Austin's SIMPLE IRA has several investment choices, and Austin has the same investment options as the other plan participants.
There are two key disclosure documents that inform participants about how the plan operates, notify them of changes in the plan's structure and operation, and give them a chance to make decisions and take timely action on their accounts.
The summary description is a plain-language explanation of the plan that informs participants of their rights and responsibilities under the plan. It also informs participants about the plan's features. The financial institution usually provides this document to participants at the plan's inception, when employees first join the plan, and annually thereafter.
A summary description must include:
You can satisfy the summary description requirement by giving employees the most recent copy of IRS Form 5304-SIMPLE or 5305-SIMPLE provided by the financial institution (if one of these model forms is used to establish the SIMPLE IRA plan), along with the financial institution's procedures for withdrawals and transfers.
Each year, in addition to the information above, employees must receive an annual election notice describing their right to make salary reduction contributions and your decision to make either matching or nonelective contributions for the following year. For employers that use one of the model forms, page 3 of both Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that can be used to provide this information to employees.
Every year, during the 60-day election period at the end of the year, you must give your employees the opportunity to enter into a salary reduction agreement or to modify an existing agreement.
SIMPLE IRA plans do NOT have to file annual financial reports with the government.
The financial institution reports distributions from the plan to both the IRS and the distribution recipients on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
The financial institution handling the SIMPLE IRAs provides the IRS and participants with an annual statement containing contribution and fair market value information on Form 5498, Individual Retirement Arrangement Contribution Information.
SIMPLE IRA contributions are not included in the “Wages, tips, other compensation” box of Form W-2, Wage and Tax Statement. However, salary reduction contributions must be included in the boxes for Social Security and Medicare wages.
Employees may elect to stop their salary reduction contributions to a SIMPLE IRA plan at any time. If they do so, the SIMPLE IRA plan may prevent them from resuming salary reduction contributions until the beginning of the next calendar year. Employers making nonelective employer contributions must continue to make them for these employees.
Participants cannot take loans from their SIMPLE IRAs, but participants can withdraw SIMPLE IRA contributions and earnings at any time. When participants take a distribution, they can typically:
Distributions from a SIMPLE IRA are generally subject to income tax for the year in which they are received. If a participant takes a withdrawal from a SIMPLE IRA before age 59½, a 10 percent additional tax generally applies. If the withdrawal occurs within 2 years of beginning participation, the additional tax increases to 25 percent.
Employees can roll over SIMPLE IRA contributions and earnings tax free from one SIMPLE IRA to another. Employees can also make tax-free rollovers from a SIMPLE IRA to another type of IRA or to another employer's qualified plan after 2 years of beginning participation in the SIMPLE IRA plan.
A specific minimum amount of SIMPLE IRA contributions and earnings is required to be distributed by April 1 of the year after the participant reaches age 72. After this initial year, the participant must receive a required minimum distribution for each year by December 31 of that year. For more information on the required minimum distribution amount, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
As the plan sponsor, you should monitor the financial institution/trustee to ensure it is doing everything it is required to do. You should also ensure that the trustee's fees are reasonable for the services it is providing. If the trustee is not doing its job properly, or if its fees are not reasonable, you should consider replacing the trustee.
Although SIMPLE IRA plans are established with the intention of continuing indefinitely, the time may come when a SIMPLE IRA plan no longer suits the purposes of your business. When that happens, consult with your financial institution to determine if another type of retirement plan might be a better alternative.
To terminate a SIMPLE IRA plan, notify the financial institution that you will not make a contribution for the next calendar year and that you want to terminate the contract or agreement.
You must also notify your employees that the SIMPLE IRA plan will be discontinued.
You do not need to give any notice to the IRS that the SIMPLE IRA plan has been terminated.
Even with the best intentions, those operating the plan can still make mistakes. The U.S. Department of Labor and the IRS have correction programs to help employers with SIMPLE IRA plans correct plan errors, protect participants' interests, and keep the plan's tax benefits. These programs are structured to encourage you to correct the errors early.
Periodically reviewing the plan makes it easier to spot and correct mistakes in plan operation. See the Resources section for further information.
To find this publication and more information on retirement plans, visit:
In addition, the following jointly developed publications are available on the DOL and IRS websites or can be ordered electronically or by calling toll free 866-444-3272.
DOL's Small Business Retirement Savings Advisor helps small business owners choose the most appropriate retirement plan for their businesses and provides resources on maintaining plans.
To view these publications, go to DOL's Saving Matters website. To order publications or request assistance from a benefits advisor, contact EBSA electronically or call toll free 866-444-3272.
To view these related publications, go to the IRS's website. The publications do not reflect any changes in the law after the date of the publication.