SIMPLE IRA (Business)
A SIMPLE IRA is a salary reduction retirement plan that employers can offer with fewer administrative requirements than most other options.
Commonly referred to as SIMPLE retirement plan, Savings Incentive Match Plans for Employees of Small Employers, SIMPLE individual retirement plan and salary reduction retirement plan
Do I Qualify for a SIMPLE IRA (Business)?
SIMPLE IRA plans are an option for businesses with fewer than 100 employees who earned $5,000 or more during the previous calendar year, as long as the business does not offer any other retirement plans.
2022 SIMPLE IRA (Business) Details
SIMPLE (short for “Savings Incentive Match Plans for Employees of Small Employers”) IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans are an option for businesses with fewer than 100 employees who earned $5,000 or more during the previous calendar year, as long as the business does not offer any other retirement plans.
Setting Up a SIMPLE Retirement Plan
Employers who meet the criteria can create a SIMPLE IRA using one of two IRS forms, depending on how the plan will be structured:
• Use IRS Form 5304-SIMPLE to set up a plan where each employee chooses the financial institution that will receive the contributions.
• Use IRS Form 5305-SIMPLE to set up a plan where all contributions will initially be deposited in a financial institution that is designated by the employer.
Employers who offer a SIMPLE IRA are required to make either:
• A matching contribution to the accounts of participating employees, or
• A nonelective contribution on behalf of each eligible employee, regardless of participation
Matching contributions are made on a dollar-for-dollar basis for no less than 1% and no more than 3% of the employee’s contributions. Nonelective contributions are calculated at 2% of each employee’s compensation, up to certain limits, and deposited into every employee’s account, regardless of whether the employees contribute any of their salary. Employee salary reduction contributions are capped annually at an inflation-adjusted limit. All SIMPLE IRA contributions, including employer contributions, are 100% vested from the start.
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• No annual filing requirements for employer.
• Employees may elect to contribute pretax dollars to reduce current taxable income.
• Employees are always 100% vested in (i.e., have ownership of) all money in their SIMPLE IRA.
• Easy and inexpensive to set up and operate.
• No discrimination testing required.
• Employee contributions to SIMPLE IRAs may be tax deductible to employer .
• Employer may be eligible for a tax credit of up to $500 per year for the cost of creating and administering a SIMPLE IRA plan in each of the first three years of the plan’s existence.
• Inflexible contributions
• Lower contribution limits than some other retirement plans
• Participant loans not allowed
Assumptions When Taking the SIMPLE IRA (Business)
• The employer wishes to make a 3% contribution to all eligible employees.
• All employees are capped at the maximum annual compensation limit.
• SIMPLE 401(k) (Business)
• Traditional 401(k) (Business)
• Solo 401(k) (Business)
• Simplified Employee Pension (SEP)
• Cash Balance Plan
• Defined Benefit Plan
• Section 412(e)(3) Plan
Requirements to Claim the SIMPLE IRA (Business)
• The business must have no more than 100 employees who earned $5,000 or more during the previous calendar year.
• The business cannot currently have any other retirement plans.
• The employer must notify each employee of the following information before the beginning of the election period (generally, the 60-day period before January 1, with some exceptions).
• Employers are required to contribute each year either a matching contribution between 1% and 3% of compensation (without limitation) for employees who contribute to their own accounts, or a nonelective contribution of 2% of salary for each eligible employee, regardless of whether the employee contributes. The 2% contribution requirement is capped at a set compensation amount, adjusted annually for inflation.
Business Entities That Can Claim the SIMPLE IRA (Business)
• Schedule C
• Schedule F
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.