A Savings Incentive Match Plan for Employees (SIMPLE plan) is a written arrangement that provides employers and their 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 deduct trustee 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.
The two types of SIMPLE plans are SIMPLE IRA plans and SIMPLE 401(k) plans.
SIMPLE IRA Plans
The employer can set up a SIMPLE IRA plan by meeting both the following requirements:
Employee Limit
An employer can only set up a SIMPLE IRA plan if there are 100 or fewer employees who earned $5,000 or more in compensation during the preceding year. Under this rule, the employer must take into account all employees who were employed any time during the calendar year regardless of whether they are eligible to participate. Employees include self-employed individuals, who received earned income, and leased employees. Once a SIMPLE IRA plan is established, the employer must continue to meet the 100-employee limit each year the plan is maintained. Less restrictive eligibility requirements can be established by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. For example, the business can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. However, the employer cannot impose any other conditions on participating in a SIMPLE IRA plan.
Excludable Employees
The following employees do not need to be covered under a SIMPLE IRA plan:
- Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union, and
- Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from the business.
No Other Qualified Plan
Generally, the SIMPLE IRA plan must be the only retirement plan the employer makes contributions to, or in which benefits accrue, that is service in any year, beginning with the year the SIMPLE IRA plan becomes effective.
Exception
The employer may maintain a qualified plan for collective bargaining employees and SIMPLE IRA plan for other employees.
Contributions
Contributions to a SIMPLE IRA are made up of salary reduction contributions and employer contributions. The employer must make either matching contributions or nonelective contributions. No other contributions can be made to the SIMPLE IRA plan. These contributions must be made timely.
Salary Reduction Contributions
The amount the employee chooses to have the employer contribute to a SIMPLE IRA on his or her behalf cannot be more than $11,500 for 2012. Individuals age 50 or older are allowed an additional catch-up contribution in the amount of $2,500. These contributions must be expressed as a percentage of the employee’s compensation, unless the employer permits the employee to express them as a specific dollar amount. The employer cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $11,500 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. These count toward the overall annual limit on exclusion of salary reductions and other elective deferrals.
Employer Matching Contributions
Generally, employers 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 to nonelective contributions.
Example:
In 2012, an employee earned $50,000 and chose to defer the maximum amount into the plan. Under the plan, a maximum matching contribution is made for each participating employee, up to the 3% limit. Therefore, the employer makes a $1,500 matching contribution to the employee’s SIMPLE IRA.
Lower Percentage
The employer can choose to make matching contributions less than 3%, but the percentage must be at least 1%. Employees must be notified of the lower match within a reasonable time period before the 60-day election period for the calendar year. A matching contribution percentage less than 3% cannot last for more than two years during the five-year period that ends with (and includes) the year for which the choice is effective.
Nonelective Contributions
Instead of matching contributions, an employer can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee, who has at least $5,000 (or selected lower amount) of compensation for the year. With this choice, nonelective contributions must be made regardless of whether the employee chooses to make salary reduction contributions. Only $250,000 for 2012 of the employee’s compensation can be taken into account to figure the contribution limit.
When choosing the 2% contribution formula, employees must be notified within a reasonable time period before the 60-day election period for the calendar year.
Time Limits for Contributing Funds
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 employees. Matching contributions or nonelective contributions must be made by the due date (including extensions) for filing federal income tax return for the year.
An employer can deduct contributions, and 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
SIMPLE IRA contributions are not included 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. The W-2 should also include the proper code in Box 12.
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 two-year participation in the SIMPLE IRA plan.
Early withdrawals generally are subject to a 10% additional tax. The additional tax is increased to 25% if funds are withdrawn within two years of beginning participation.
Simple 401(k) Plans
A SIMPLE plan can be adopted as part of a 401(k) plan if the 100-employee limit is met. 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, provided the plan meets the conditions below:
- Under the plan, an employee can choose to have salary reduction contributions for the year made to a trust in an amount expressed as a percentage of the employee’s compensation. The amount cannot be more than $11,500 for 2012.
- The employer must make either:
- Matching contributions up to 3% of compensation for the year, or
- Nonelective contributions of 2% of compensation on behalf of each eligible employee, who has at least $5,000 of compensation for the year.
- No other contributions can be made to the trust.
- No contributions are made and no benefits accrue for services during the year under any other qualified retirement plan of the employer on behalf of any employee eligible to participate in the SIMPLE 401(k) plan.
- The employee’s rights to any contributions are nonforfeitable.
- No more than $250,000 in 2012 of the employee’s compensation can be taken into account in figuring salary reduction contributions, matching contributions, and nonelective contributions.
Considering these points, employers should consult with a tax adviser about some of the finer points of setting up a SIMPLE retirement plan. Henssler Financial’s Tax & Accounting Division will be happy to help determine will work best for your situation. Please do not hesitate to call our experts at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
