Savings Incentive Match Plans for Employees (SIMPLE) are retirement plans offered by small businesses, which have simplified plan rules. The SIMPLE IRA plan combines features of a SIMPLE plan and a Traditional IRA plan.
In a Defined Contribution (DC) plan, each participant has a separate account where contributions are deposited. Contributions can be made either by participant or employer or both. Plan provisions define the rules for contributions.
Contributions towards DC plans are tax deferred both for employees and employers as per prevailing IRS rules. There are various types of DC plans such as Individual Retirement Accounts (IRA), Profit Sharing Plans, SIMPLE Plans and Money Purchase Plans, to name a few. A few more are designed to serve specific needs.
Individual Retirement Account (IRA) plans are essentially personal savings accounts where individuals contribute towards their retirement savings. The individual must have a taxable income to contribute to an IRA. Spouses can contribute towards an individual’s IRA account if the person is unemployed.
An IRA account can be opened with a financial institution that offers the IRA plan. The contributions can be either pre-tax or after tax, and enjoy tax benefits based on prevailing IRS rules. A few IRA plans are described below, but do not cover all types of IRAs:
1. Traditional IRA Plan – Contributions to Traditional IRA plans are on a pre-tax basis, which allows participants to defer the tax on contributions until distribution. There is a limit on allowed contribution.
2. Roth IRA Plan – Roth IRA plans allow contribution on after-tax basis, where the earnings on the accumulated contributions are not taxed, provided a few distribution conditions are met. There is a limit on allowed contribution.
3. Rollover IRA Plan – This is a type of Traditional IRA plan where the participant’s account receives the contribution as a rollover from an erstwhile employer-sponsored retirement plan.
Savings Incentive Match Plans for Employees (SIMPLE) are specific plans that can be offered only by small businesses having 100 employees or fewer. Employers that offer SIMPLE plans, are not allowed to offer any other retirement plans to their employees. SIMPLE plans have simplified plan rules and are exempted from complex nondiscrimination testing associated with other qualified plans. This results in lower administrative cost for SIMPLE plans.
There are mainly two types of SIMPLE plans:
1. SIMPLE IRA Plans – This is a Traditional IRA plan sponsored by an employer for their employees.
2. SIMPLE 401(k) Plans – This is a Profit-Sharing plan – 401(k) plan – sponsored by an employer with certain restrictions, e.g. type of contributions allowed, classes of eligible employees, among others.
SIMPLE IRA Plans
The SIMPLE IRA plan combines features of a SIMPLE plan and a Traditional IRA plan.
These plans are Traditional IRA plans which can be sponsored only by an employer. In other words, an individual cannot subscribe to the plan if not employed.
The following section describes features of a SIMPLE IRA plan:
1. Employer Eligibility rules to offer the plan
a. The SIMPLE IRA plan can be offered by an employer who does not offer any other retirement plan to their employees, and has 100 or fewer employees who earn at least $5,000.00 in preceding year
b. An employer who has offered a SIMPLE IRA plan and has crossed the employee limit of 100 subsequently, remains eligible to offer the plan for two years after crossing the limit, also known as the grace period.
2. Participant Eligibility rules
a. No age restrictions – An employee may not become ineligible based solely on his/her age
b. Employees must have earned at least $5,000.00 in the previous two years and expect earning of at least $5,000.00 in the current year.
3. Contribution types
a. Employee Deferral contributions are allowed. After-tax contributions are not allowed.
b. Catchup contributions are allowed if the employee is aged 50 or more
c. Employer contributions – The employer can choose either matching or non-elective contributions
4. Contribution Limits
a. Employee Deferral Limits
i. Up to $12,500.00 and Catchup of $3,000.00 (Year 2016-2018)
ii. The elective deferrals (point ‘a’ above) count towards overall annual limit on elective deferral for the employee who may participate in other plans (having elective deferrals)
iii. Employees may not wish to contribute regularly to their SIMPLE IRA plan
b. Employer Matching Contributions Limits
i. If employer opts for matching contribution, every employee’s deferral must be matched on a dollar-for-dollar basis up to 3% of employee’s compensation (employee compensation limits do not apply in this case).
ii. The 3% contribution rule can be relaxed for a calendar year with restrictions – it cannot be reduced below 1% and also cannot be reduced for more than two years out of the 5-year period. Employees must be notified reasonably in advance (before the 60-day election period when the employees make salary deferral agreements)
c. Employer Non Elective Contribution Limits
i. If the employer opts for non-elective contribution, it must make non-elective contribution of 2% of the employee’s compensation up to the annual compensation limit (for 2018 it is $275,000.00).
ii. Employer must contribute to all eligible employees, irrespective of whether employees make deferral contribution or not.
5. Vesting – One of the features of this plan is immediate vesting on employer contributions as soon as the employer makes deposits to the employee’s SIMPLE IRA account.
6. Loans – Loans are not allowed from SIMPLE IRA plan assets.
a. Withdrawals from SIMPLE IRA plans attract a penalty of 25% if withdrawn within the first two years of the start of the plan, and 10% if withdrawn after two years of the start of the plan, in addition to the ordinary income tax, before the age of 59.5 years – unless exceptions apply.
b. Required withdrawals must begin at 70.5 years.
Disclaimer: The information in this blog post has been collated mainly from IRS and DOL websites and from publicly-available content on the Web. This content is for knowledge and information purpose only.