SIMPLE Retirement Plans for Small Employers

What Is a SIMPLE Plan?

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a type of tax-deferred retirement account that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to a SIMPLE account.

The employer may make either matching or non-elective contributions to each eligible employee's SIMPLE IRA, and employees may make salary deferral contributions.

Understanding SIMPLE Plans

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan, similar in some ways to 401(k) and 403(b) plans. SIMPLE IRAs are simpler and have lower start-up and administrative costs than many other retirement plans. The employer does not have filing requirements with a SIMPLE IRA.

According to Internal Revenue Service regulations, only employers with fewer than 100 employees — and which do not offer other retirement plans — may establish a SIMPLE IRA. All employees who received $5,000 or more in compensation from an employer during any two previous calendar years and who are expected to receive $5,000 or more in compensation this year are eligible to participate in the employer’s SIMPLE IRA plan.

A SIMPLE IRA has the same rules on investments, distributions, and rollovers as traditional IRAs.

The Employer's Two Alternatives

SIMPLE IRAs require employers to make a minimum contribution to the account, while employees are not required to contribute. The employer has two alternatives when it comes to making these contributions. The first is to match the amounts that employees make toward their own elective-deferral contribution up to 3% of the employee's annual compensation.

The second alternative is for the employer to make a flat 2% nonelective contribution to all qualified employees, regardless of whether the employee makes any contributions.

Contributions to SIMPLE IRAs are immediately 100% vested, and the IRA owner directs the investments.

Limits of SIMPLE Plan

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) has lower contribution limits than most other employer-sponsored retirement plans. For 2020 and 2021, the contribution limit is $13,500 for employees under age 50, while those aged 50 or older were able to make a catch-up contribution of an extra $3,000. Additional details on contribution limits are available from the Internal Revenue Service (IRS).

A SIMPLE IRA can only be rolled over to a traditional IRA after a two-year waiting period, beginning from the day that the employee first participated in the plan.