Fullerton, Lemann,
Schaefer & Dominick, LLP

SIMPLE IRA Plans

In order to reduce the costs of administering an individual retirement arrangement (IRA), Congress created the SIMPLE IRA plan, a Savings Incentive Match Plan for Employees of Small Employers. The establishment of a SIMPLE IRA allows employees to choose to defer a portion of their salaries into the plan for retirement.

Only small businesses of 100 or fewer employees are permitted to set up a SIMPLE IRA plan. The business cannot have any other retirement plan.

Although an employer may not impose a minimum age requirement in a SIMPLE IRA plan, he is entitled to limit participation to employees with a certain minimum amount of compensation. The plan does not have to cover employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith or who are certain nonresident alien employees

Under a SIMPLE IRA plan, employees who elect to defer a portion of their salaries into the plan immediately own (are fully vested in) all contributions to the plan. An employer is required to contribute to the plan. He or she may elect to make a contribution matching the employees' contributions dollar for dollar up to three percent of salary. With this election, he is only required to make contributions on behalf of eligible employees who make their own contributions. Alternatively, the employer may choose to make a two percent nonelective contribution for each eligible employee. In other words, under the non-elective formula, the employer is required to contribute on behalf of each eligible employee up to two percent of the employee's salary even if the worker does not make any contribution.

So why would an employer chose to set up a SIMPLE IRA plan? The benefits are many, including the ease and low cost of setting up and operating the plan. In addition, no costly discrimination testing is required, as with other types of retirement plans. On the downside, the contributions are inflexible, and there are lower contribution limits than in some other types of retirement plans. Participants in a SIMPLE IRA are not permitted to borrow from the plan.

An employee is entitled to withdraw from his SIMPLE IRA, but the withdrawals are included in income and subject to a 10 percent additional tax if the employee is under 59-1/2. If the withdrawals are made within the first two years of participation, the 10 percent additional tax is increased to 25 percent.

An employee is entitled to roll over his SIMPLE IRA contributions and earnings tax-free from one SIMPLE IRA to another or to an IRA that is not a SIMPLE IRA. However, if the rollover is into a non-SIMPLE IRA, the employee must wait until he has participated in the SIMPLE IRA plan for two years before being eligible for the tax-free rollover.

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