A SIMPLE plan allows small employers with 100 or fewer employees to offer retirement savings through salary reduction contributions and required employer contributions. Employers cannot maintain another retirement plan at the same time unless it covers union employees. SIMPLE plans may be structured as SIMPLE IRAs or SIMPLE 401(k)s, and either version may allow Roth contributions.
Both SIMPLE IRAs and SIMPLE 401(k)s follow the same contribution limits and salary‑reduction rules. A SIMPLE 401(k) is a qualified plan and may be exempt from certain nondiscrimination and top‑heavy requirements.
Establishing a SIMPLE Plan
A SIMPLE plan must operate on a calendar‑year basis. It is generally established on January 1 and terminated on December 31. Exceptions:
- A new employer may establish a plan between January 1 and October 1
- A new business formed after October 1 may establish the plan as soon as feasible
- An employer that previously maintained a SIMPLE plan may only start a new one on January 1
Employee Notification Requirements
Before the election period, employers must notify employees of:
- Salary reduction options
- Employer contribution method
- Summary description from the financial institution
- Right to transfer balances without cost if a designated institution is used
Election Period
The standard election period is the 60 days before January 1 (November 2–December 31). If the plan begins mid‑year, the election period is adjusted.
Plan Documents
For SIMPLE IRAs, employers may use:
- Form 5304‑SIMPLE — employees choose their own institution
- Form 5305‑SIMPLE — employer designates the institution
SIMPLE IRAs have no annual filing requirement. SIMPLE 401(k)s require an annual filing.
Eligible Employees
An employee is eligible if they:
- Earned at least $5,000 in any two prior years, and
- Are expected to earn at least $5,000 in the current year
Self‑employed individuals count as employees for eligibility. Employers may use less restrictive rules but not more restrictive ones.
Contribution Deadlines
- Salary reduction contributions: must be deposited within 30 days after the end of the month they would have been paid
- Employer contributions: due by the employer’s tax return due date, including extensions
Some plans may have earlier deadlines under labor rules.
Contribution Limits
Employee Contributions
- Salary reduction contributions up to the SIMPLE annual limit
- Contributions may be expressed as a percentage of compensation or a dollar amount
- Maximum percentage is 100% of compensation up to the SIMPLE limit
Catch‑Up Contributions
- Age 50+ participants may contribute an additional catch‑up amount
- Ages 60–63 may contribute a higher catch‑up amount
Multiple Plans
If an employee participates in multiple employer plans, total elective deferrals across all plans cannot exceed the annual combined limit.
Employer Contributions
Employers must choose one of two methods:
- 3% Matching Contribution
- Dollar‑for‑dollar match up to 3% of compensation
- SIMPLE 401(k) uses the annual compensation limit; SIMPLE IRA does not
- Employer may reduce the match to as low as 1% for no more than two years in a five‑year period
- Employees must be notified before the election period
- 2% Nonelective Contribution
- Employer contributes 2% of compensation for all eligible employees
- Compensation is capped at the annual limit
All SIMPLE contributions are 100% immediately vested.
Employer Deduction Limits
Employers may deduct SIMPLE contributions made for employees. Self‑employed individuals deduct their own contributions on their personal return, not as a business expense.
Reporting on Wage Statements
Employer Contributions
- Not included in taxable wages
- Retirement plan box must be checked
- Roth SIMPLE employer contributions are included in taxable income and reported as plan distributions
Employee Contributions
- Salary reduction contributions:
- Pre‑tax
- Excluded from taxable wages
- Subject to FICA and unemployment taxes
- Reported in Social Security and Medicare wage boxes
- Listed in box 12 with the appropriate code
- Roth contributions:
- After‑tax
- Included in taxable wages
- Subject to FICA and unemployment taxes
- Reported in all wage boxes and box 12