SIMPLE IRA plan Fix-it Guide – SIMPLE IRA plan overview

Any type of employer can establish a SIMPLE IRA plan, including tax-exempt entities, governmental entities and employers of domestic workers.

Contributions by employees and employers

Employees can make elective salary deferrals to the plan rather than receiving these amounts as part of regular pay. The maximum elective deferrals employees can make each year are:

• $16,000 in 2024 ($15,500 in 2023; $14,000 in 2022; $13,500 in 2021 and in 2020; $13,000 in 2019)
• plus an additional $3,500 in 2023 and 2024 ($3,000 in 2019, 2020, 2021, and 2022) for employees age 50 or older
• these limits are subject to cost-of-living increases in later years

Employers are required to make either a matching contribution (up to 3%) or a 2% fixed (nonelective) contribution for each eligible employee. Prior to November 2, the beginning of the 60-day election period, the employer must notify employees which contribution it will provide the next calendar year.

Matching contribution: If an employee elects to make a salary deferral, then the employer must match the employee’s contribution dollar-for-dollar, up to 3% of the employee’s compensation. The employer doesn't have to make a matching contribution if the employee didn't make an elective deferral.

You may temporarily reduce the 3% match if:

1. the revised matching contribution isn't less than 1% of pay,
2. the reduction didn't occur for more than 2 years during the 5-year period ending in the year for which the election was made, and
3. each employee was notified of the reduced match within a reasonable time before the employee’s 60-day election period.

Fixed (nonelective) contribution: An employer who opts for the fixed contribution is committing to make a contribution of 2% of compensation for each of its eligible employees, regardless of whether the employee elects to defer salary. The fixed contribution can’t be reduced like the matching contribution.

Establishing a SIMPLE IRA plan

Timing: Generally (provided you didn’t previously maintain a SIMPLE IRA plan), you can set up a SIMPLE IRA plan effective on any date between January 1 and October 1.

• If you're a new employer coming into existence after October 1, you can set up a SIMPLE IRA plan as soon as administratively feasible after coming into existence.
• If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year.
• A SIMPLE IRA plan can't have an effective date that is before the date you actually adopt the plan. You can only maintain SIMPLE IRA plans on a calendar-year basis.

Model forms: You can set up your SIMPLE IRA plan using:

1. Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) PDF - Not for use with a designated financial institution, or
   
2. Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) PDF - For use with a designated financial institution.

Each form is a SIMPLE IRA plan document. Use Form 5304-SIMPLE if you permit plan participants to select the financial institution to receive their SIMPLE IRA plan contributions. Use Form 5305-SIMPLE if you require all contributions under the SIMPLE IRA plan to be initially deposited at a financial institution you designate.

The SIMPLE IRA plan is adopted when you've completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Keep the original form. Don't file it with the IRS.

If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can also use the form to:

• Meet the employer notification requirements for the SIMPLE IRA plan. Page 3 of Forms 5304-SIMPLE and 5305-SIMPLE contain a “Model Notification to Eligible Employees” that you can use to provide the necessary information to the employee.
  
• Provide employees with a salary deferral agreement. Page 3 also contains a “Model Salary Reduction Agreement.”

Financial institution forms: As an alternative to the IRS models, you may establish a SIMPLE IRA plan by adopting a prototype SIMPLE IRA plan document (usually through a mutual fund, insurance company, bank or other qualified financial institution).

Setting up SIMPLE IRAs

SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for each eligible employee. Forms 5305-S, SIMPLE Individual Retirement Trust Account PDF , and 5305-SA, SIMPLE Individual Retirement Custodial Account PDF , are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. A SIMPLE IRA can't be designated as a Roth IRA.

A SIMPLE IRA must be set up for an employee before the first date a contribution must be deposited into the employee’s IRA.

Effect on IRA limits: Contributions to a SIMPLE IRA won't affect the amount an individual can contribute to a Roth IRA or a traditional IRA. However, contributions to a SIMPLE IRA may preclude an individual from receiving a tax deduction for contributions to a traditional IRA because the individual is considered “covered by an employer plan.”

Credit for costs of establishing a SIMPLE IRA Plan

You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan. (See Form 8881, Credit for Small Employer Pension Plan Startup Costs PDF ).