SIMPLE IRA

March 13, 2024

3706 / What is a SIMPLE IRA plan?

<div class="Section1">A SIMPLE (which stands for Savings Incentive Match Plan for Employees) IRA plan is a simplified, tax-favored retirement plan offered by small employers that provides employees with a simplified method to contribute toward their retirement savings. Employees may choose to make salary reduction contributions (aka elective deferrals) and the employer is required to make either matching or nonelective contributions. Contributions are made to an IRA set up for each employee that meets certain vesting, participation, and administrative requirements described below.<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> A SIMPLE IRA plan may permit contributions only under a qualified salary reduction arrangement, which is defined as a written arrangement of an “eligible employer” (defined below) under which: <blockquote>(1)   employees eligible to participate may elect to receive payments in cash or contribute them directly to a SIMPLE IRA per a salary deferral; (2)   the amount to which such an election applies must be expressed as either a percentage of compensation or as a dollar amount, but in any case cannot exceed $16,500 per year (for 2025 (projected)), up from $16,000 per year for 2024<a href="#_ftn2" name="_ftnref2">2</a>); (3)   the employer must make matching contributions or nonelective contributions to the account according to one of the formulas described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3707">3707</a>; and (4)   no contributions other than those described in (1) and (3) may be made to the account.<a href="#_ftn3" name="_ftnref3">3</a></blockquote> Certain lower income taxpayers may be eligible to claim the saver’s credit for elective deferrals to a SIMPLE IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3648">3648</a>). Elective Deferral and Catch-up Contributions The amount contributed via an elective deferral cannot exceed $16,000 to 2024.<a href="#_ftn4" name="_ftnref4">4</a> A SIMPLE IRA plan, however, may permit catch-up contributions by participants who reach age 50 (or over) by the end of the plan year.<a href="#_ftn5" name="_ftnref5">5</a> The limit on catch-up contributions to SIMPLE IRAs is the lesser of (a) a specified dollar limit, or (b) the excess (if any) of the participant’s compensation over any other elective deferrals for the year made without regard to the catch-up limits.<a href="#_ftn6" name="_ftnref6">6</a> The dollar limit is $3,500 in 2023-2025 (projected) and $3,000 in 2016-2022.<a href="#_ftn7" name="_ftnref7">7</a> A SIMPLE IRA will not be treated as violating any of the applicable limitations of Section 408(p) merely on account of the making of (or right to make) catch-up contributions, provided a universal availability requirement is met.<a href="#_ftn8" name="_ftnref8">8</a> See <a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p9-pps/pltypfea/401k/Pages/3739-00-tf1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a> for details on the requirements for catch-up contributions. Elective contribution amounts made under a SIMPLE IRA plan are counted in the overall limit ($23,500 in 2025 (projected), $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, and $19,000 in 2019) on elective deferrals by any individual.<a href="#_ftn9" name="_ftnref9">9</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a> for the definition of “elective deferral.” Thus, for example, an individual under age 50 who defers the maximum of $16,500 to a SIMPLE IRA of one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $7,000 in 2025 (projected) to the 401(k) plan.<a href="#_ftn10" name="_ftnref10">10</a> Catch-up contributions are not subject to the limits of IRC Section 402(g) and do not reduce an individual’s otherwise applicable deferral limit under any other plan.<a href="#_ftn11" name="_ftnref11">11</a> Definitions An arrangement will not be treated as a qualified salary reduction arrangement if the employer, or a predecessor employer, maintained another qualified plan (including a 403(a) annuity, a 403(b) tax sheltered annuity, a SEP, or a governmental plan other than an IRC Section 457 plan) under which contributions were made or benefits accrued for service during any year in which the SIMPLE IRA plan was in effect. But if only employees other than those covered under a collectively bargained agreement are eligible to participate in the SIMPLE IRA plan, this rule will be applied without regard to a collectively bargained plan.<a href="#_ftn12" name="_ftnref12">12</a> Also, for purposes of this rule, transfers, rollovers, or forfeitures are disregarded except to the extent that forfeitures replace otherwise required contributions.<a href="#_ftn13" name="_ftnref13">13</a> Only an eligible employer may adopt a SIMPLE IRA plan. An “eligible employer” is defined as an employer who employed no more than 100 employees earning at least $5,000 from the employer during the preceding year.<a href="#_ftn14" name="_ftnref14">14</a> For purposes of this limitation, all employees employed at any time during the calendar year are taken into account, even those who are excludable or are ineligible to participate. Furthermore, certain self-employed individuals who receive earned income from the employer during the year must be counted for purposes of the 100-employee limitation.<a href="#_ftn15" name="_ftnref15">15</a> An employer who maintains a plan in which only collectively bargained employees may participate is not precluded from offering a SIMPLE IRA to its noncollectively bargained employees.<a href="#_ftn16" name="_ftnref16">16</a> Generally, an eligible employer who ceases to be eligible after having established and maintained a SIMPLE IRA plan for at least one year will, nonetheless, continue to be treated as eligible for the following two years.<a href="#_ftn17" name="_ftnref17">17</a> But special rules apply where a failure to remain eligible (or to meet any other requirement of IRC Section 408(p)) was due to an acquisition, disposition, or similar transaction involving another eligible employer.<a href="#_ftn18" name="_ftnref18">18</a> Compensation, for purposes of most of the SIMPLE IRA provisions, includes wages (as defined for income tax withholding purposes), elective contributions made under a SIMPLE IRA plan, and elective deferrals, including compensation deferred under an IRC Section 457 plan.<a href="#_ftn19" name="_ftnref19">19</a> A self-employed individual who is treated as an employee may be a participant in a SIMPLE IRA plan; for this purpose, “compensation” means net earnings from self-employment, prior to subtracting the SIMPLE IRA plan contribution.<a href="#_ftn20" name="_ftnref20">20</a> An employee’s elective deferrals under a 401(k) plan, a SAR-SEP, and a Section 403(b) annuity contract are also included in the meaning of compensation for purposes of the 100-employee limitation (i.e., the $5,000 threshold) and the eligibility requirements.<a href="#_ftn21" name="_ftnref21">21</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 408(p)(1); Notice 98-4, 1998-1 CB 269; General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), p. 140 (the “1996 Blue Book”). <a href="#_ftnref2" name="_ftn2">2</a>.   Notice 2022-55, Notice 2023-75. <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 408(p)(2); Notice 98-4; IR-2011-103, IR-2013-86, IR-2014-99, IR-2015-118. <a href="#_ftnref4" name="_ftn4">4</a>.   IRC §§ 408(p)(2)(A)(ii), 408(p)(2)(E). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 414(v). <a href="#_ftnref6" name="_ftn6">6</a>.   IRC § 414(v)(2)(A). <a href="#_ftnref7" name="_ftn7">7</a>.   IR-2015-118, Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75. <a href="#_ftnref8" name="_ftn8">8</a>.   IRC § 414(v)(3); see Prop. Treas. Reg. § 1.414(v)-1(d). <a href="#_ftnref9" name="_ftn9">9</a>.   IRC § 402(g)(3)(D); Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75. <a href="#_ftnref10" name="_ftn10">10</a>.   Notice 2023-75. <a href="#_ftnref11" name="_ftn11">11</a>.   IRC § 414(v)(3)(A). <a href="#_ftnref12" name="_ftn12">12</a>.   IRC § 408(p)(2)(D). <a href="#_ftnref13" name="_ftn13">13</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref14" name="_ftn14">14</a>.   IRC § 408(p)(2)(C)(i). <a href="#_ftnref15" name="_ftn15">15</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref16" name="_ftn16">16</a>.   IRC § 408(p)(2)(D)(i). <a href="#_ftnref17" name="_ftn17">17</a>.   IRC § 408(p)(2)(C)(i)(II). <a href="#_ftnref18" name="_ftn18">18</a>.   IRC § 408(p)(10). <a href="#_ftnref19" name="_ftn19">19</a>.   IRC § 408(p)(6)(A). <a href="#_ftnref20" name="_ftn20">20</a>.   IRC § 408(p)(6)(A)(ii). <a href="#_ftnref21" name="_ftn21">21</a>.   Notice 98-4, 1998-1 CB 269. </div></div>

March 13, 2024

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

<div class="Section1">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.<a href="#_ftn1" name="_ftnref1">1</a> 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.<a href="#_ftn2" name="_ftnref2">2</a><div class="Section1"> All 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.<a href="#_ftn3" name="_ftnref3">3</a> The early distribution penalty on withdrawals, however, is increased to 25 percent during the first two years of participation (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3709">3709</a>).<a href="#_ftn4" name="_ftnref4">4</a> 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).<a href="#_ftn5" name="_ftnref5">5</a> 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.<a href="#_ftn6" name="_ftnref6">6</a> 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.<a href="#_ftn7" name="_ftnref7">7</a> 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 $23,500 (in 2025 projected) on elective deferrals.<a href="#_ftn8" name="_ftnref8">8</a> An employer who establishes a SIMPLE IRA plan is not responsible for monitoring compliance with this limitation.<a href="#_ftn9" name="_ftnref9">9</a> 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.<a href="#_ftn10" name="_ftnref10">10</a> 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.<a href="#_ftn11" name="_ftnref11">11</a> The administrative requirements for SIMPLE IRA plans state that an employer must deposit elective employee contributions (elective deferrals) within 30 days after the last day of the month in which the amounts would otherwise be payable to the employee in cash, and that employer’s matching and nonelective contributions must be made no later than the filing date for the return for the taxable year (including extensions).<a href="#_ftn12" name="_ftnref12">12</a> Employees must have the right to terminate participation at any time during the year; but the plan may preclude the employee from resuming participation thereafter until the beginning of the next year.<a href="#_ftn13" name="_ftnref13">13</a> Generally, each employee must have 60 days before the first day of any year (and 60 days before the first day the employee is eligible to participate) to elect whether to participate in the plan, or to modify his deferral amount.<a href="#_ftn14" name="_ftnref14">14</a> A SIMPLE IRA plan must be maintained on a calendar year basis.<a href="#_ftn15" name="_ftnref15">15</a> The IRS apparently has adopted a requirement that a plan be adopted not later than October 1 of the year for which the plan is established, but states that the October 1 requirement “does not apply to a new employer that comes into existence after October 1 of the year the SIMPLE IRA Plan is established if the employer establishes the SIMPLE IRA Plan as soon as administratively feasible after the employer comes into existence.”<a href="#_ftn16" name="_ftnref16">16</a> See <a href="http://pro.moss.nuco.com/taxfacts2018/tfempb/p8-irp/simpira/Pages/3684-00-TF1.aspx"> Q </a><a href="javascript:void(0)" class="accordion-cross-reference" id="3709">3709</a> regarding the tax treatment of SIMPLE IRA plan contributions, distributions, and rollovers. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3778">3778</a> regarding SIMPLE 401(k) plans. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Notice 98-4, 1998-1 CB 269, A-2. <a href="#_ftnref2" name="_ftn2">2</a>.   P.L. 114-113; see IRC § 408(p)(1)(B). <a href="#_ftnref3" name="_ftn3">3</a>.   IRC §§ 408(p)(3), 408(k)(4). <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 72(t)(6). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 408(p)(4)(A). <a href="#_ftnref6" name="_ftn6">6</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref7" name="_ftn7">7</a>.   IRC § 408(p)(4)(B). <a href="#_ftnref8" name="_ftn8">8</a>.   Notice 2023-75. <a href="#_ftnref9" name="_ftn9">9</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref10" name="_ftn10">10</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref11" name="_ftn11">11</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref12" name="_ftn12">12</a>.   IRC §§ 408(p)(5)(A), 404(m)(2)(B). <a href="#_ftnref13" name="_ftn13">13</a>.   IRC § 408(p)(5)(B). <a href="#_ftnref14" name="_ftn14">14</a>.   IRC § 408(p)(5)(C). <a href="#_ftnref15" name="_ftn15">15</a>.   Notice 98-4, 1998-1 CB 269. <a href="#_ftnref16" name="_ftn16">16</a>.   Notice 98-4, 1998-1 CB 269, at K-1. </div></div>

March 13, 2024

3711 / What are the differences between a simplified employee pension (SEP) and a SIMPLE IRA?

<div class="Section1">Simplified employee pensions (SEP) and SIMPLE IRAs are both types of retirement accounts designed to help small business owners offer retirement benefits to employees (as well as to provide for themselves). Contributions to both types of accounts are (within limits) tax deductible by the employer and earnings accumulate on a tax-deferred basis, but permitted contribution levels vary based on the type of account chosen (see below). Penalties on early withdrawals also vary as discussed below.<div class="Section1"> Both SEP IRAs and SIMPLE IRAs must meet certain vesting, participation, nondiscrimination and other administrative requirements (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>). Generally, a SEP IRA is a traditional individual retirement account or individual retirement annuity that is adopted by a business to provide retirement benefits for the business owners and employees and may accept a higher rate of contributions than traditional IRAs.<a href="#_ftn1" name="_ftnref1">1</a> The SEP IRA is owned by the employee. The SEP rules permit an employer to contribute a limited amount of money each year on behalf of its employees. A self-employed individual may contribute to his or her own SEP. All contributions must be in the form of money; property cannot be contributed. Although contributions are not required every year, any contributions made by an employer in a given year must be based on a written formula and must not discriminate in favor of highly-compensated employees. A SIMPLE (which stands for Savings Incentive Match Plan for Employees) IRA plan is a simplified, tax-favored retirement plan offered by small employers that provides employees with a simplified method to contribute toward their retirement savings. Employees may choose to make salary reduction contributions (aka elective deferrals) and the employer is required to make either matching or nonelective contributions.<a href="#_ftn2" name="_ftnref2">2</a> A SIMPLE IRA plan may permit contributions only under a qualified salary reduction arrangement (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>). Both SEP IRAs and SIMPLE IRAs are attractive retirement savings vehicles for small businesses, but SIMPLE IRA sponsors should keep in mind that the accounts must be funded each year (i.e., a contribution must always be made for employees who earn $5,000 or more per year, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3708">3708</a>). SIMPLE IRAs have lower contribution limits than SEP IRAs, as discussed below. SEP IRAs tend to be more popular among self-employed individuals because there is no annual funding requirement. However, if a SEP IRA is funded in any year, contributions must be made to the accounts of certain employees (i.e., those who are 21, have at least $650 in compensation and performed services for the employer during the year in question, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3701">3701</a>). Contributions SEPs are treated as defined contribution plans for purposes of the overall limits on employer contributions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>).<a href="#_ftn3" name="_ftnref3">3</a> For plan years beginning in 2025 (projected), the annual additions limit for defined contribution plans as a whole is the lesser of $70,000 ($69,000 for 2024, $66,000 for 2023, $61,000 for 2022, $58,000 for 2021, $57,000 for 2020)<a href="#_ftn4" name="_ftnref4">4</a> or 100 percent of compensation.<a href="#_ftn5" name="_ftnref5">5</a> Any contribution by an employer to a SEP must be aggregated with all other employer contributions by that employer to defined contribution plans for purposes of the Section 415(c) limit on annual additions. Catch-up contributions to a SEP IRA are only permitted in grandfathered plans established prior to 1997. Contributions to a SIMPLE IRA cannot exceed $16,500 per year in 2025 (projected) ($16,000 in 2024, $15,500 in 2023, $14,000 in 2022, $13,500 in 2020-2021), but may provide for catch-up contributions in the amount of $3,500 per year (as indexed for 2025 (projected)) for participants who have reached age 50 by the end of the plan year.<a href="#_ftn6" name="_ftnref6">6</a> Elective contribution amounts made under a SIMPLE IRA plan are counted in the overall limit ($23,500 in 2025 (projected)) on elective deferrals by any individual.<a href="#_ftn7" name="_ftnref7">7</a> Early Withdrawals Early withdrawals (prior to age 59½) from a SEP IRA may subject the participant to an additional 10 percent penalty tax (plus ordinary income tax). Participants in a SIMPLE IRA will be subject to a 25 percent tax on early withdrawals if the withdrawal is made within two years of participating in a SIMPLE IRA. After the two-year period has expired, a 10 percent additional penalty tax will apply to early withdrawals.<a href="#_ftn8" name="_ftnref8">8</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 408(k). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 408(p)(1); Notice 98-4, 1998-1 CB 269. <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 415(a)(2)(C). <a href="#_ftnref4" name="_ftn4">4</a>.   Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75. <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 415(c)(2). <a href="#_ftnref6" name="_ftn6">6</a>.   IRC § 414(v). <a href="#_ftnref7" name="_ftn7">7</a>.   IRC § 402(g)(3)(D); Notice 2023-75. <a href="#_ftnref8" name="_ftn8">8</a>.   IRC § 72(t)(6). </div></div>