Operating a SIMPLE IRA Plan
Who is eligible to participate in a SIMPLE
Generally, any employee who has received at least $5,000 in compensation
from you during any 2 preceding calendar years, and is expected to
receive at least $5,000 in compensation in the current calendar year.
What are the contribution rules?
SIMPLE IRAs hold the contributions made for each eligible employee. A
SIMPLE IRA is funded by:
Employee elective deferrals (also referred to as salary reduction
to $11,500 in 2012 ($12,000 in 2013)*
•For employees age 50 or over, a $2,500 “catch-up” contribution is
also allowed (in 2012 and 2013)*
Employer must annually choose one of the contribution methods below.
The employer must tell employees during the election period which
method will be used for that year
elective contribution - 2% of each eligible employee’s compensation
regardless of whether or how much the employee deferred, or
matching contribution – match of employee’s elective deferrals on a
dollar-for-dollar basis up to 3% of the employee's compensation.
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.
employer cannot make any other contributions to a SIMPLE IRA plan.
*Each employee’s total contributions
are limited and subject to annual cost-of-living-adjustments.
plan contributions can be invested in individual stocks, mutual funds
and similar types of investments. Note that employees can move their
SIMPLE IRA assets from one SIMPLE IRA to another.
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
In operation, 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.
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 non
elective employer contributions must continue to make them on behalf of
When and where are contributions made?
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
Employer matching or non elective contributions - by the due date
(including extensions) for filing your federal income tax return for
send the SIMPLE IRA plan contributions to the financial institution you
selected, that institution will manage the funds. It's worth noting that
employees can move their SIMPLE IRA assets from one SIMPLE IRA to
another. SIMPLE IRA plan contributions can be put into stocks, mutual
funds, and other 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.
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?
You must notify each employee before the beginning of the election
employee’s opportunity to make or change a salary reduction choice
under the SIMPLE IRA plan;
employees’ ability to select a financial institution that will serve
as trustee of the employees’ SIMPLE IRA, if applicable;
decision to make either matching contributions or non elective
summary description (the financial institution should provide this
notice that the employee can transfer his or her balance without
cost or penalty if you are using a designated financial institution.
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.
What are the basic distribution/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.
SIMPLE IRA contributions and earnings may be rolled over 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 are not permitted.
What are the filing and notice requirements?
Filing requirements: An employer generally has no filing requirements,
including the 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, but
check the "Retirement Plan" box in box 13. For more information, see the
instructions for Forms W-2 and W-3. 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 non elective contributions are not subject to these taxes.
Reporting employer deductions of contributions. The employer can deduct
its contributions to a SIMPLE IRA plan.
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.
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
How can I tell if my plan is operating within the rules
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.
What do I do if I made a mistake in operating my plan?
Generally, if the SIMPLE IRA plan fails to satisfy the requirements for
SIMPLE IRA plans, tax benefits can be lost. However, any error can
likely be corrected by using one of the IRS correction programs.
Publication 4334, SIMPLE IRA Plans for Small Businesses
IRA Plan Fix-It Guide, Common Problems, Real Solutions
IRA Plan Frequently Asked Questions
Retirement Plans Navigator - a retirement plan Web guide for small
amend or terminate my SIMPLE IRA plan in the middle of the year?
http://www.IRS.gov. Page Last Reviewed
or Updated: 2012-10-25
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