You might have read or heard of the Savings Incentive Match Plan for Employees, also known as SIMPLE. A SIMPLE IRA account is easier to open and maintain rather than 401k plans. If you are opting to establish one for yourself and your employees, you may need to know more information like the SIMPLE IRA rules. Fret not, this article will list some rules you need to know before setting up an account. Read more and get informed.
5 SIMPLE IRA Rules | A SIMPLE IRA Primer
1. 100-employee Limitation
Only employers (including self-employed individuals, tax-exempt organizations and governmental entities) with 100 employees or less with incomes and compensations amounting to $5,000 or more in the previous calendar year can establish a SIMPLE IRA plan. To conform to this rule, an employer must take into account all employees employed, even those who haven’t met the plan’s eligibility requirements, at any time during the calendar year. (Source: IRS)
2. Employee Participation Requirement
An employee should have at least $5,000 in compensation during any 2 years prior to the current calendar year to participate in a SIMPLE IRA plan. They should also have an expected compensation of at least $5,000 during the filing calendar year.
3. Earlier Filing Deadline
Great info on the difference between a 401(k) and a SIMPLE IRA. https://t.co/e7FjH6O1An
— Lee Sherbakoff (@LeeSherb1) August 28, 2017
For this year, the deadline to open a traditional IRA is April 15, 2018, the tax filing deadline for the 2017 tax year.
In contrast to a traditional IRA, SIMPLE IRAs have an earlier filing deadline. If you haven’t maintained a SIMPLE IRA plan before, the filing deadline is between January 1 to October 1 of the year. If you’ve started your business after October 1, you can establish an account as soon as administratively feasible after you’ve started your business.
For employers with previous SIMPLE IRA plans, the deadline for setting up an account is January 1.
4. Contribution Rules
A SIMPLE IRA is funded both by employees of the company and the employer.
- Employees under the age 50 have a yearly contribution limit of $12,500. Employees aged 50 and above are granted an additional $3,000 to their yearly contribution limit.
- Employers can choose between two contribution methods.
- 2% nonelective contribution – the employer’s contribution for a year will amount to 2% of an eligible employee’s compensation.
- 3% matching contribution – the employer will match an employee’s salary-deferral on a dollar-for-dollar basis up to 3% of the employee’s compensation.
Employee contributions are deducted from their salaries. An employer has to choose a contribution method for their company’s SIMPLE IRA yearly.
5. Two Year Rule
A 25% penalty awaits if one withdraws funds from a SIMPLE IRA that is less than two years old. This is a lot higher than the usual 10% penalty imposed on premature and unqualified withdrawals from other types of IRAs.
Watch how John Colegrove compares SIMPLE IRAs to 401k in this video:
A SIMPLE IRA is a good 401k alternative for startup companies who can’t afford the higher upfront and annual admin costs of a 401k. It serves as a sort of a starter plan for growing companies.
Do you know other SIMPLE IRA rules that we might have missed? Let us know in the comments section below!