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Firstgov gov 3. Firstgov gov Savings Incentive Match Plans for Employees (SIMPLE) Table of Contents Introduction What Is a SIMPLE Plan?Eligible Employees How Are Contributions Made? How Much Can Be Contributed on Your Behalf?Matching contributions less than 3%. Firstgov gov Traditional IRA mistakenly moved to SIMPLE IRA. Firstgov gov When Can You Withdraw or Use Assets?Are Distributions Taxable? Introduction This chapter is for employees who need information about savings incentive match plans for employees (SIMPLE plans). Firstgov gov It explains what a SIMPLE plan is, contributions to a SIMPLE plan, and distributions from a SIMPLE plan. Firstgov gov Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as: Part of a 401(k) plan, or A plan using IRAs (SIMPLE IRA). Firstgov gov This chapter only discusses the SIMPLE plan rules that relate to SIMPLE IRAs. Firstgov gov See chapter 3 of Publication 560 for information on any special rules for SIMPLE plans that do not use IRAs. Firstgov gov If your employer maintains a SIMPLE plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution. Firstgov gov See Rollovers and Transfers Exception, later under When Can You Withdraw or Use Assets. Firstgov gov What Is a SIMPLE Plan? A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Firstgov gov See chapter 3 of Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan. Firstgov gov A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to: Reduce your compensation (salary) by a certain percentage each pay period, and Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. Firstgov gov These contributions are called salary reduction contributions. Firstgov gov All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. Firstgov gov The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Firstgov gov Contributions are made on behalf of eligible employees. Firstgov gov (See Eligible Employees below. Firstgov gov ) Contributions are also subject to various limits. Firstgov gov (See How Much Can Be Contributed on Your Behalf , later. Firstgov gov ) In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. Firstgov gov See How Are Contributions Made , later. Firstgov gov You may be able to claim a credit for contributions to your SIMPLE plan. Firstgov gov For more information, see chapter 4. Firstgov gov Eligible Employees You must be allowed to participate in your employer's SIMPLE plan if you: Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made. Firstgov gov Self-employed individual. Firstgov gov For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income. Firstgov gov Excludable employees. Firstgov gov Your employer can exclude the following employees from participating in the SIMPLE plan. Firstgov gov Employees whose retirement benefits are covered by a collective bargaining agreement (union contract). Firstgov gov Employees who are nonresident aliens and received no earned income from sources within the United States. Firstgov gov Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year. Firstgov gov Compensation. Firstgov gov For purposes of the SIMPLE plan rules, your compensation for a year generally includes the following amounts. Firstgov gov Wages, tips, and other pay from your employer that is subject to income tax withholding. Firstgov gov Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457) plans, SEP plans, and SIMPLE plans. Firstgov gov Self-employed individual compensation. Firstgov gov For purposes of the SIMPLE plan rules, if you are self-employed, your compensation for a year is your net earnings from self-employment (Schedule SE (Form 1040), Section A, line 4, or Section B, line 6) before subtracting any contributions made to a SIMPLE IRA on your behalf. Firstgov gov For these purposes, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. Firstgov gov How Are Contributions Made? Contributions under a salary reduction agreement are called salary reduction contributions. Firstgov gov They are made on your behalf by your employer. Firstgov gov Your employer must also make either matching contributions or nonelective contributions. Firstgov gov Salary reduction contributions. Firstgov gov During the 60-day period before the beginning of any year, and during the 60-day period before you are eligible, you can choose salary reduction contributions expressed either as a percentage of compensation, or as a specific dollar amount (if your employer offers this choice). Firstgov gov You can choose to cancel the election at any time during the year. Firstgov gov Salary reduction contributions are also referred to as “elective deferrals. Firstgov gov ” Your employer cannot place restrictions on the contributions amount (such as by limiting the contributions percentage), except to comply with the salary reduction contributions limit, discussed under How Much Can Be Contributed on Your Behalf, later. Firstgov gov Matching contributions. Firstgov gov Unless your employer chooses to make nonelective contributions, your employer must make contributions equal to the salary reduction contributions you choose (elect), but only up to certain limits. Firstgov gov See How Much Can Be Contributed on Your Behalf below. Firstgov gov These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees (defined earlier) who chose salary reductions. Firstgov gov These contributions are referred to as matching contributions. Firstgov gov Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions. Firstgov gov Nonelective contributions. Firstgov gov Instead of making matching contributions, your employer may be able to choose to make nonelective contributions on behalf of all eligible employees. Firstgov gov These nonelective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from your employer, whether or not the employee chose salary reductions. Firstgov gov One of the requirements your employer must satisfy is notifying the employees that the election was made. Firstgov gov For other requirements that your employer must satisfy, see chapter 3 of Publication 560. Firstgov gov How Much Can Be Contributed on Your Behalf? The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made. Firstgov gov Salary reduction contributions limit. Firstgov gov Salary reduction contributions (employee-chosen contributions or elective deferrals) that your employer can make on your behalf under a SIMPLE plan are limited to $12,000 for 2013. Firstgov gov The limitation remains at $12,000 for 2014. Firstgov gov If you are a participant in any other employer plans during 2013 and you have elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the annual limit of $17,500 for 2013 on exclusions of salary reductions and other elective deferrals. Firstgov gov You, not your employer, are responsible for monitoring compliance with these limits. Firstgov gov Additional elective deferrals can be contributed to your SIMPLE plan if: You reached age 50 by the end of 2013, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit. Firstgov gov The most that can be contributed in additional elective deferrals to your SIMPLE plan is the lesser of the following two amounts. Firstgov gov $2,500 for 2013, or Your compensation for the year reduced by your other elective deferrals for the year. Firstgov gov The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. Firstgov gov The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them. Firstgov gov Matching employer contributions limit. Firstgov gov Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. Firstgov gov These matching contributions cannot be more than 3% of your compensation for the calendar year. Firstgov gov See Matching contributions less than 3% below. Firstgov gov Example 1. Firstgov gov In 2013, Joshua was a participant in his employer's SIMPLE plan. Firstgov gov His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Firstgov gov Instead of taking it all in cash, Joshua elected to have 12. Firstgov gov 5% of his weekly pay ($100) contributed to his SIMPLE IRA. Firstgov gov For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $12,000 limit on these contributions. Firstgov gov Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Firstgov gov Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600). Firstgov gov Example 2. Firstgov gov Assume the same facts as in Example 1 , except that Joshua's compensation for the year was $408,163 and he chose to have 2. Firstgov gov 94% of his weekly pay contributed to his SIMPLE IRA. Firstgov gov In this example, Joshua's salary reduction contributions for the year (2. Firstgov gov 94% × $408,163) were equal to the 2013 limit for salary reduction contributions ($12,000). Firstgov gov Because 3% of Joshua's compensation ($12,245) is more than the amount his employer was required to match ($12,000), his employer's matching contributions were limited to $12,000. Firstgov gov In this example, total contributions made on Joshua's behalf for the year were $24,000 ($12,000 (Joshua's contributions) + $12,000 (matching contributions)), the maximum contributions permitted under a SIMPLE IRA for 2013. Firstgov gov Matching contributions less than 3%. Firstgov gov Your employer can reduce the 3% limit on matching contributions for a calendar year, but only if: The limit is not reduced below 1%, The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements. Firstgov gov For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which your employer (or a former employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. Firstgov gov If your employer chooses to make nonelective contributions for a year, that year also will be treated as a year for which the limit was 3%. Firstgov gov Nonelective employer contributions limit. Firstgov gov If your employer chooses to make nonelective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of your compensation for the entire year. Firstgov gov For 2013, only $255,000 of your compensation can be taken into account to figure the contribution limit. Firstgov gov Your employer can substitute the 2% nonelective contribution for the matching contribution for a year if both of the following requirements are met. Firstgov gov Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution. Firstgov gov This notice is provided within a reasonable period during which employees can enter into salary reduction agreements. Firstgov gov Example 3. Firstgov gov Assume the same facts as in Example 2 , except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Firstgov gov Because his employer's nonelective contributions are limited to 2% of up to $255,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $5,100. Firstgov gov In this example, total contributions made on Joshua's behalf for the year were $17,100 (Joshua's salary reductions of $12,000 plus his employer's contribution of $5,100). Firstgov gov Traditional IRA mistakenly moved to SIMPLE IRA. Firstgov gov If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA. Firstgov gov For more information, see Recharacterizations in chapter 1. Firstgov gov Recharacterizing employer contributions. Firstgov gov You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. Firstgov gov SEPs are discussed in chapter 2 of Publication 560. Firstgov gov SIMPLE plans are discussed in this chapter. Firstgov gov Converting from a SIMPLE IRA. Firstgov gov Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained in chapter 1 under Converting From Any Traditional IRA Into a Roth IRA . Firstgov gov However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer. Firstgov gov When Can You Withdraw or Use Assets? Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. Firstgov gov These rules are discussed in chapter 1. Firstgov gov Your employer cannot restrict you from taking distributions from a SIMPLE IRA. Firstgov gov Are Distributions Taxable? Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. Firstgov gov If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. Firstgov gov See Additional Tax on Early Distributions, later. Firstgov gov Rollovers and Transfers Exception Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. Firstgov gov Two-year rule. Firstgov gov To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. Firstgov gov The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA. Firstgov gov After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). Firstgov gov Additional Tax on Early Distributions The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. Firstgov gov If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%. Firstgov gov If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed. Firstgov gov Prev Up Next Home More Online Publications
Stakeholder Liaison Local Contacts
Stakeholder Liaison establishes relationships with practitioner and industry organizations representing small business and self-employed taxpayers. We provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. We also elevate issues that affect tax administration. To establish a relationship with us or report an issue, use this list to find a contact in your state.
Please note, the contacts on this page are intended for practitioner and industry stakeholders, not to respond to tax law questions. For tax law questions, please refer to the “Help and Resources” tab on the irs.gov home page.
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Page Last Reviewed or Updated: 30-Aug-2013
The Firstgov Gov
Firstgov gov Publication 4492 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains the major provisions of the Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005. Firstgov gov Useful Items - You may want to see: Publication 526 Charitable Contributions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 547 Casualties, Disasters, and Thefts 946 How To Depreciate Property Form (and Instructions) 4506Request for Copy of Tax Return 4506-TRequest for Transcript of Tax Return 4684Casualties and Thefts 5884Work Opportunity Credit 5884-ACredits for Employers Affected by Hurricane Katrina, Rita, or Wilma 8863Education Credits (Hope and Lifetime Learning Credits) 8914Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina 8915Qualified Hurricane Retirement Plan Distributions and Repayments Prev Up Next Home More Online Publications