Establishing a SIMPLE IRA plan for a company with only a few employees.

• Author: Hackett, Trenda B.

A SIMPLE IRA plan can be adopted by employers that maintain no other qualified retirement plans and that generally have no more than 100 employees with compensation of $5,000 or more per year. A SIMPLE IRA plan allows employees to make elective salary-deferral contributions to an individual retirement account (IRA), expressed as a percentage of compensation, up to $15,500 per year for 2023 (Secs. 408(p)(2)(A)(i), (ii), and (E); Notice 2022-55). Compensation includes amounts that must be reported by the employer on Form W-2, Wage and Tax Statement, plus any elective contributions from the employee. SIMPLE IRA plans may allow individuals who have attained at least age 50 by the calendar year end to make additional catch-up contributions (Sec. 414(v)(5)(A)). For 2023, the maximum allowable catch-up contribution is $3,500 (Sec. 414(v) (2)(B)(ii); Notice 2022-55).

Each employee who receives at least $5,000 in compensation from the employer during any two prior years and who is reasonably expected to earn at least $5,000 in the current year must be eligible to participate in the SIMPLE IRA plan (Sec. 408(p) (4)(A)). Self-employed individuals are treated as employees for this purpose. Also, leased employees are required to be included if they meet the salary requirements (Sec. 414(n)). Each eligible employee may elect, during the 60-day period before the beginning of any year, to make elective salary-deferral contributions under the SIMPLE IRA plan for such year and to modify any previous elections (Sec. 408(p)(5)(C)). Employees must be allowed to stop making elective contributions at any time during the year. The plan may provide that employees who do so cannot resume them until the beginning of the next year.

Making mandatory employer contributions under a SIMPLE IRA

The employer is required to make payments to each employee's SIMPLE IRA under one of the following formulas:

Matching contribution formula: The employer generally is required to match each employee's elective contributions dollar for dollar, up to 3% of the employee's compensation (Sec. 408(p)(2)(A)(iii)). A special rule allows the employer, in no more than two out of any five years, to elect a lower rate (but not less than 1%) for all employees. The employer must notify employees of the intended match rate within a reasonable time before the 60-day election period for the year.

Nonelective contribution formula: The employer is required to make a contribution equal to 2% of...