A SIMPLE IRA is so simple that the IRS suggests that there are four phases of understanding a SIMPLE:
- Deciding on which SIMPLE,
- creating it,
- understanding and making contributions,
- terminating it.
The IRS literature about a Savings Incentive Match PLan for Employers extols the virtues of it from this point of view:
- An easy way to include employees in a retirement plan.
- The employer must contribute and the eligible employee may contribute.
- The financial institution that holds the SIMPLE takes care of virtually all filing requirements.
- An eligible employee is one who
- Received at least $5,000 in compensation from you during any two preceeding years,
- is expected to receive at least $5,000 during the current year,
- is not covered by a union plan.
However, the employer looks at it from another point of view: How can I make a $5,000 IRA-like contribution to my retirement without having to contribute toward employee accounts?
Yearunder age 50age 50 or over2003$8,000$9,0002004$9,000$10,5002005$10,000$12,0002006$10,000$12,500
- If the employer has an eligible employee, the employer mustmust contribute into the employee's plan.
- How much? That is determined by which of two SIMPLE plans the employer set up at the beginning of the plan:
The 2% plan.
- This is called the 2% non-elective contribution.
- In this plan, the employer must contribute 2% of the employee's gross wages into the employee's SIMPLE IRA account.
- The employee does not have to make any contributions at all; the employer still does.
- If he wants to, the employee may contribute up to his contribution limit.
- The 2% plan.
But if the employer selects the dollar-for-dollar plan, he does not have to put any money if the employee does not.
- If the employee puts money into his SIMPLE IRA, then employer must match it dollar-for-dollar.
- However, the employer stops when his contribution for the year reaches 3% of the employee's gross wages for the year.
- The employer can even reduce the 3% to 1% in two of five years counting the current year and four preceeding years.
- The employer's hope is that the eligible employee will not make any contributions to his plan.