ANSWERS TO THE MOST COMMONLY ASKED QUESTIONS ABOUT SIMPLE IRA PLANS Q-1. What is a SIMPLE IRA? Q-2. What employer contributions, if any, are required by the SIMPLE? Q-3. How does the dollar-for-dollar match up to 3% of pay work? Q-4. How does the flat 2% of pay contribution work? Q-5. What is the timing of the employer contribution? Q-6. What is the timing of the employee contribution? Q-7. May the employer make additional contributions in a SIMPLE IRA? Q-8. What are the vesting and eligibility requirements in a SIMPLE IRA? Q-9. How much can employees contribute into a SIMPLE IRA? Q-10. What happens if an employee also has a tax deductible IRA plan elsewhere?
Q-1. What is a SIMPLE IRA? A-1. The SIMPLE (Savings Incentive Match Plan for Employees), implemented by the Small Business Job Protection Act of 1996, was established to allow employees of small businesses to save for retirement by using salary deferrals. Intended to be a low-cost alternative to a SARSEP Plan, SIMPLE IRAs can only be set up by small firms and feature a prescribed contribution structure. As a result, SIMPLE plans automatically satisfy IRS requirements for top-heaviness, deferral percentages, and owners’ contributions. This, in turn, means that it is less expensive and less complicated to administer. Q-2. What employer contributions, if any, are required by the SIMPLE? A-2. In a SIMPLE IRA, the employer must make only one of the following contributions from year-to-year: I. II. A dollar-for-dollar match up to 3% (or 1% every two out of five years) of the employee’s pay. --OR-A flat 2% of the employee’s pay.
Q-3. How does the dollar-for-dollar match up to 3% of pay work? A-3. The dollar-for-dollar match up to 3% of pay contribution is dependent on what the employee contributes. Because it is a “match,” an employee not contributing would receive no employer contribution. Likewise, because it is “dollar-for-dollar,” if an employee contributed 2% of pay, s/he would receive a 2% of pay employer contribution (the employer matches the employee). The 3% comes in as a cap. So if an employee contributes 10% of pay, the employer would contribute 3% of pay. In other words, the most that the employer would be responsible for is 3% of payroll. Some examples are as follows: Employee contributes 0%, the employer would contribute 0%. Employee contributes 2%, the employer would contribute 2%. Employee contributes 3%, the employer would contribute 3%. Employee contributes 6%, the employer would contribute 3%. Employee contributes 10%, the employer would contribute 3%.
Q-4. How does the flat 2% of pay contribution work? A-4. Instead of doing the dollar-for-dollar match up to 3% of pay as described above, an employer may opt to contribute a flat 2% of pay on behalf of all eligible employees. Regardless of what the employee contributes (i.e., 0%, 3%, or 10%), the employer contributes 2% of pay. Q-5. What is the timing of the employer contribution? A-5. The employer may choose to do either the matching up to 3%, or the flat 2%, on a yearto-year basis. The election to do so should be done proactively, before the beginning of the plan year in order to provide enough notice to employees. Most employers provide their contribution with every payroll, paralleling the time period that the employee contributes. Q-6. What is the timing of the employee contribution? A-6. Because the SIMPLE IRA plan uses salary deferrals, employee contributions normally take place per payroll period. The employer must deposit the employee contributions into the SIMPLE IRA plan within 30 days after the date of the deferral. For example, if an employee withheld 10% of pay from his 12/15/02 paycheck, the 10% contribution must be deposited before 01/14/03.
Q-7. May the employer make additional contributions in a SIMPLE IRA? A-7. No, an employer may not make any contribution other than the 2% of pay, or matching up to 3% election, described above. No supplemental contributions, profit sharing amounts, or integration may be made by an employer participating in a SIMPLE IRA. The SIMPLE must be the only plan in use by an employer. Q-8. What are the vesting and eligibility requirements in a SIMPLE IRA? A-8. Employee contributions (i.e., deferrals) are always 100% vested. In addition, the employer SIMPLE IRA contribution (i.e, the 2%, or 3% match), is also 100% vested. Employees who have earned at least $5,000 during any two preceding calendar years, and who are reasonably expected to receive at least $5,000 in the current year, must be eligible to participate in the SIMPLE IRA plan. An employer may be less restrictive, however, when establishing participation requirements. Q-9. How much can employees contribute into a SIMPLE IRA? A-9. An employee may contribute up to $10,000 in 2005. Employees who are age 50+ may contribute an extra $2,000. The dollar limit is scheduled to increase over the next 5 years. The amount that an employee contributes is in addition to the employer’s contribution(s) described above. Owners and principals may contribute up to this full dollar limit without regard to how much other employees are contributing. There is no percentage limitation on how much an individual may contribute into the SIMPLE IRA plan. Q-10. What happens if an employee also has a tax deductible IRA plan elsewhere? A-10. Depending on their income, most employees will be unable to make both a SIMPLE IRA contribution and a deductible IRA contribution for any given year. Employees may contribute to a non-deductible, or Roth, IRA in the same year that they participate in an IRA plan.