3708 / Do any special rules apply to a SIMPLE IRA plan?

Contributions under a SIMPLE IRA plan may be made only to a SIMPLE IRA. Prior to 2016, a SIMPLE IRA could receive only contributions under a SIMPLE IRA plan and rollovers or transfers from another SIMPLE IRA account.¹ However, the Protecting Americans Against Tax Hikes Act of 2015 (PATH) eliminated this prohibition, so that a SIMPLE IRA may now accept rollover contributions from traditional IRAs, SEP-IRAs, 401(k)s, 457(b) plans and 403(b) plans so long as the SIMPLE IRA has been open for at least two years.²All contributions to a SIMPLE IRA account must be fully vested and may not be subject to any prohibition on withdrawals, nor conditioned on their retention in the account.³ The early distribution penalty on withdrawals, however, is increased to 25 percent during the first two years of participation (see Q 3709).⁴

The participation requirements for SIMPLE IRAs state that all nonexcludable employees who received at least $5,000 in compensation from the employer during any two preceding years and are reasonably expected to receive at least $5,000 in compensation during the year must be eligible to make the cash or deferred election (if the matching formula is used) or to receive nonelective contributions (if the nonelective formula is used).⁵ Of course, employers are free to impose less restrictive eligibility requirements, such as a $3,000 compensation threshold, but they may not impose more restrictive ones.⁶ The $5,000 threshold compensation amount is not indexed for inflation. Nonresident aliens who received no U.S. income and employees subject to a collective bargaining agreement generally are excludable employees for purposes of the participation requirement.⁷ An employee who participates in another plan of a different employer may participate in a SIMPLE IRA plan, but will be subject to the aggregate limit of 23,000 (in 2024) on elective deferrals.⁸ An employer who establishes a SIMPLE IRA plan is not responsible for monitoring compliance with this limitation.⁹

Tax-exempt employers and governmental entities are permitted to maintain SIMPLE IRA plans. Excludable contributions may be made to the SIMPLE IRA of employees of tax-exempt employers and governmental entities on the same basis as contributions may be made to employees of other eligible employers.¹⁰ Related employers (i.e., controlled groups, partnerships or sole proprietorships under common control, and affiliated service groups) must be treated as a single employer for purposes of the SIMPLE IRA rules, and leased employees will be treated as employed by the employer. Consequently, all employees (and leased employees) of an employer who satisfy the eligibility requirements (see below) must be permitted to participate in the SIMPLE IRA of a related employer.¹¹