What is a SIMPLE IRA?

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

This plan is available to any employer (including self-employed individuals) with 100 or fewer employees that does not currently maintain another retirement plan. The plan can be easily established by adopting IRS Model Form 5304-SIMPLE or 5305-SIMPLE.

A SIMPLE IRA plan must be offered to all employees who have compensation of at least $5,000 in any prior 2 years, and who are reasonably expected to earn at

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 Federal Unemployment Tax Act taxes. Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans: $12,500 for 2016 ($15,500 if individual over the age of 50), as compared to $18,000 for a 401(k) plan.

Only an “eligible employer” may establish a SIMPLE IRA. An eligible employer is one with no more than 100 employees. An employer who has already established a SIMPLE IRA may continue to be “eligible” for two years after crossing the 100 employee limit.  Employees are not required to make regular IRA contributions to their SIMPLE IRA account.

The plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% of the employee’s compensation (subject to certain rules that allow for lower contributions—see IRC Sec. 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes. The employee contribution limit is $12,500 for 2016 ($15,500 for individuals over the age of 50).

In general, with a SIMPLE IRA:

  • The Employer must have 100 or fewer employees
  •  Employees can contribute through payroll deduction
  • •Required employer contributions
  • Easy to set up and operate • No annual filing requirement
  • No loans
  • At least $5,000 in the current year.

There is no hours-of-service requirement in this type of plan.