Exception
If you maintain a qualified
plan for collective bargaining employees, you are permitted to maintain a SIMPLE
IRA plan for other employees.
Contributions
Contributions to a SIMPLE IRA are made up of salary reduction contributions
and employer contributions. You, as the employer, must make either matching contributions
or nonelective contributions. No other contributions can be made to the SIMPLE
IRA plan. These contributions, which you can deduct, must be made timely.
Salary
Reduction Contributions
The amount the employee chooses to have you
contribute to a SIMPLE IRA on his or her behalf cannot be more than $10,500 for
2008. These contributions must be expressed as a percentage of the employee's
compensation unless you permit the employee to express them as a specific dollar
amount. You cannot place restrictions on the contribution amount (such as limiting
the contribution percentage), except to comply with the $10,500 limit.
If
an employee is a participant in any other employer plan during the year and has
elective salary reductions or deferred compensation under those plans, the salary
reduction contributions under a SIMPLE IRA plan also are elective deferrals that
count toward the overall annual limit on exclusion of salary reductions and other
elective deferrals.
Employer
Matching Contributions
You generally are required to match each
employee's salary reduction contributions on a dollar-for-dollar basis up to 3%
of the employee's compensation. This requirement does not apply if you make nonelective
contributions.
Example:
In 2008, your employee earned $50,000 and chose to defer the maximum
amount into the plan. Under the plan, you make a maximum matching contribution
for each participating employee, up to the 3% limit. Therefore, you make a $1,500
matching contribution to the employee's SIMPLE IRA.
Lower
Percentage
If you, the employer, choose a matching contribution less
than 3%, the percentage must be at least 1%. You must notify the employees of
the lower match within a reasonable period of time before the 60-day election
period for the calendar year. You cannot choose a percentage less than 3% for
more than 2 years during the 5-year period that ends with (and includes) the year
for which the choice is effective.
Nonelective
Contributions
Instead of matching contributions, you can choose to make
nonelective contributions of 2% of compensation on behalf of each eligible employee
who has at least $5,000 (or some lower amount you select) of compensation from
you for the year. If you make this choice, you must make nonelective contributions
whether or not the employee chooses to make salary reduction contributions. Only
$230,000 for 2008 of the employee's compensation can be taken into account to
figure the contribution limit.
If
you choose this 2% contribution formula, you must notify the employees within
a reasonable period of time before the 60-day election period for the calendar
year.
Time
Limits for Contributing Funds
You,
the employer, must make the salary reduction contributions to the SIMPLE IRA within
30 days after the end of the month in which the amounts would otherwise have been
payable to the employee in cash. You must make matching contributions or nonelective
contributions by the due date (including extensions) for filing your federal income
tax return for the year.
You
can deduct your contributions and your employees can exclude these contributions
from their gross income. 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 nonelective
contributions are not subject to these taxes.
Reporting
on Form W-2
Do not include SIMPLE
IRA contributions in the "Wages, tips, other compensation box " of Form W-2. However,
salary reduction contributions must be included in the boxes for social security
and Medicare wages. Also include the proper code in Box 13.
Distributions
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.
Simple 401(k) Plans
You
can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee
limit. A SIMPLE 401(k) plan is a qualified retirement plan and generally must
satisfy the rules. However, a SIMPLE 401(k) plan is not subject to the nondiscrimination
and top-heavy rules in that discussion provided the plan meets the conditions
listed below.
A
Savings Incentive Match Plan for Employees (SIMPLE plan) is a written arrangement
that provides employers and your employees with a 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, the employer will contribute matching or nonelective
contributions. The employer can also deduct trustees' fees if contributions to
the plan do not cover them. Earnings on the contributions are generally tax-free
until distributions are made from the plan. SIMPLE plans can only be maintained
on a calendar-year basis. 