Employees
| Questions & | | Answers
In 1996, The Savings Incentive Match Plan for Employees (SIMPLE) was created giving employers an alternative to other more complicated retirement plans that require top-heavy and discrimination testing.
| Q:
What is a SIMPLE IRA?
| A: |
A SIMPLE IRA is a retirement plan funded by employee pre-tax salary deferrals and required employer contributions. Employees reduce their current taxable earnings, while saving for retirement at the same time. This benefit enhances employee retention.
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Q:
Who may establish a SIMPLE IRA?
| A:Sole Proprietors, Partnerships, and Corporations with 100 or fewer eligible employees may open a SIMPLE IRA. Employers may not maintain another employer-sponsored plan during any part of the year that a SIMPLE IRA is established.
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Q:
What are the eligibility
requirements?A:
Employees are eligible if they:
- Earned $5,000 from the employer during any previous two years.
- Expect to earn at least $5,000 during the current year.
Note: The 5305-SIMPLE also allows for full eligibility without any requirements.
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Q:
What is the required employer contribution?
| A:
Employers are required to make a contribution in one of two ways and to notify employees of their contribution method 60 days before the start of the plan year.
- 100% match up to 3% of employee compensation.or
- Nonelective contribution of 2% of compensation (not to exceed $160,000) for each eligible employee earning at least $5,000 for the year (even those not deferring).
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Q:
How much may an employee contribute?
| A:Employees may defer up to the lesser of 100% of compensation or $6,000. Deferrals cannot be made for any period before plan establishment.
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Q:
What is the contribution deadline?
| A: Salary deferrals must be deposited to the SIMPLE IRA of each employee within 30 days after the end of the month when the money was withheld. Employees may make or change elections during the 60-day period before
January 1 of the applicable year (less restrictive requirements can apply).
Employer contributions must be deposited by the employer's tax filing deadline including extensions.
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Q:
How do you take money out of a SIMPLE IRA? | A:Contributions are 100% vested. Employees may withdraw money at any time. However, penalties may apply. Early withdrawals are subject to the 10% premature penalty tax like IRAs. Also, any withdrawals during the first two years are subject to a 25% early withdrawal tax (not in addition to the 10%).
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Q:
Can a SIMPLE IRA be transferred or rolled over?
| A: SIMPLE IRAs can be transferred to another SIMPLE IRA tax and penalty free at any time. However, assets may be rolled over to an IRA only after two years of participation.
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Q:
Are there any testing requirements?
| A:There are no top-heavy rules or discrimination testing because of the required employer contribution. However, employers must provide employees with a copy of the SIMPLE IRA Trust on an annual basis. Employers also need to notify IRS of active eligible employees and deferral amounts on IRS Form W-2.
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