SIMPLE Retirement Plans
UPDATED: February 7, 2019
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Thanks to the provisions of the Small Business Jobs Protection Act of 1996, employers who meet the following requirements can set up what are know as SIMPLE (Savings Investment Match Plans for Employees of Small Employers) retirement plans on behalf of eligible employees:
- the employer has 100 or fewer employees who earned at least $5,000 in the preceding year, and
- does not currently maintain other retirement plans.
A SIMPLE plan can be one of two types:
- An IRA for each eligible employee, or
- Part of a qualified cash or deferred arrangement such as a 401(k) plan.
Since each are afforded different treatment under the law, employers need to consider the unique requirements before selecting between the two.
In either case, employees may make pretax contributions of up to $13,000 per year in 2019 ($12,500 in 2015-2018) into the SIMPLE plan. Employers must match employees' contributions dollar-for-dollar, up to 3% of pay, or make a fixed 2% across-the board contribution to all eligible employees, whether they participate or not. (If the employer elects a matching contribution that is less than 3%, the percentage must not be less than 1%.) Participants who are 50 years of age or older may make additional catch-up contributions of $3,000 in 2015-2019. (These contributions are subject to annual cost-of-living increases.)
Contributions to a SIMPLE Plan are deductible by the employer and are excluded from the gross income of the employee. Employees can terminate participation at any time during the year. Contributions to a SIMPLE IRA must be made one month after the end of the year.
Distributions from a SIMPLE retirement account are subject to IRA rules and are included in income when withdrawn. Tax-free rollovers can generally be made from one SIMPLE account into another retirement account,but check with a financial advisor because there may be different rules depending on how long you've been with our employer, and what kind of plan you're rolling from and rolling into. Early withdrawals generally are subject to a 10% (or 25%) penalty.
When employers start these plans, the employer can either permit employees to select the financial institution for SIMPLE IRA contributions or send contributions for all employees to one institution.
For more information about SIMPLE plans, refer to the Department of Labor's informational brochure (in pdf format) at: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/simple-ira-plans-for-small-businesses.pdf.