What are the SIMPLE IRA rules?

The Savings Incentive Match Plan for Employees, or SIMPLE, is a retirement plan structured as an IRA, which can be established by smaller employers with up to 100 eligible employees.

Under a SIMPLE IRA, workers and the employers share the responsibility of funding the program by making contributions, subject to certain restrictions.

How SIMPLE IRA Works

Employees who are eligible to participate in a SIMPLE IRA make elective-deferral contributions on a tax-deferred basis. The part of the participants' salaries that goes into funding the plan is taxed only when distributed.

Eligible employees are those who earn a minimum of $5,000 from a company every year. In addition, SIMPLE IRAs allow self-employed people to participate.

Employees can defer portions of their wages to fund their SIMPLE IRAs but their contributions are subject to certain limits. For 2008, for example the maximum annual employee deferral contribution for a SIMPLE IRA participant was $10,500. For 2009, the admissible employee contribution was up to $11,500 for people below age 50, and $14,00 for individuals aged 50 or older.

Unlike other employee benefit retirement plans, it is mandatory for employers to make matching contributions to a SIMPLE IRA. Employers get a tax-deduction for any contributions they make to their employees' retirement plan.

The amount of employer's contributions can either be based on a percentage of the employee elective deferral contributions, or paid to all the eligible employees, regardless of whether they participate in the plan, or not. Under the matching contribution option, the employer's contribution matches the employee contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. The other - non-elective - funding option requires employers to make contributions to all eligible employees.

The employee's elective deferral contributions to the SIMPLE IRA plan are made on a tax-deferred basis. Distributions, however, are subject to tax.

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