3673. What is a SIMPLE IRA plan?Nuco EmployeeCaroline McKay342012-10-22T16:55:00Z2015-11-20T16:03:00Z2016-07-11T01:20:00Z49785578Hewlett-Packard4613654314Site Map/Individual Retirement Plans/SIMPLE IRASIMPLE IRA2005-01-19T00:00:00ZTaxFactsDefaultArticleSite Map/Individual Retirement Plans/Quick Clicks/Elective Deferral LimitsSite Map/Retirement Plans/Quick Clicks/Elective Deferral Limits114950242-00-tf1.xml243.00;#1793;#1797;#2281;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What is a SIMPLE IRA plan?108100.000000000TaxFactsDefaultArticle2010-01-19T08:13:16ZSBMEDIA\moss-admin4111dbb3-6119-41fc-9d9c-28768801cec4|860213e4-571f-47a5-87b8-447a05d125dc|418cb1a4-cd12-4850-9ac0-40a08423f6ec3673. What is a SIMPLE IRA plan?A SIMPLE (which stands for Savings Incentive Match Plan for Employees) IRA plan is a simplified, tax-favored retirement plan offered by small employers that provides employees with a simplified method to contribute toward their retirement savings. Employees may choose to make salary reduction contributions (aka elective deferrals) and the employer is required to make either matching or nonelective contributions. Contributions are made to an IRA set up for each employee that meets certain vesting, participation, and administrative requirements described below..IRC Sec. 408(p)(1); Notice 98-4, 1998-1 CB 269; General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), p. 140 (the “1996 Blue Book”).A SIMPLE IRA plan may permit contributions only under a qualified salary reduction arrangement, which is defined as a written arrangement of an “eligible employer” (defined below) under which:(1)employees eligible to participate may elect to receive payments in cash or contribute them directly to a SIMPLE IRA per a salary deferral,(2)the amount to which such an election applies must be expressed as either a percentage of compensation or as a dollar amount, but in any case cannot and may not exceed $12,500 per year (in 2016,.IR-2015-118. $12,500 in 2015, up from $12,000 in 2014). ; but the amount of the contribution may also be expressed as a dollar amount,(3)the employer must make matching contributions or nonelective contributions to the account according to one of the formulas described in Q 3674, and (4)no contributions other than those described in (1) and (3) may be made to the account..IRC Sec. 408(p)(2); Notice 98-4; IR-2011-103, IR-2013-86, IR-2014-99, IR-2015-118. Certain lower income taxpayers may be eligible to claim the saver’s credit for elective deferrals to a SIMPLE IRA (Q 3619).Elective Deferral and Catch-up ContributionsThe amount contributed via an elective deferral cannot exceed $12,500 for 2016..IRC Secs. 408(p)(2)(A)(ii), 408(p)(2)(E); IR-2015-118. A SIMPLE IRA plan, however, may permit catch-up contributions by participants who reach age 50 (or over) by the end of the plan year..See IRC Sec. 414(v). The limit on catch-up contributions to SIMPLE IRAs is the lesser of (a) a specified dollar limit, or (b) the excess (if any) of the participant’s compensation over any other elective deferrals for the year made without regard to the catch-up limits..IRC Sec. 414(v)(2)(A). The dollar limit is $3,000 in 2016.IR-2015-118. ($3,000 in 2015, $2,500 in 2010-2014). (sSee Appendix E for earlier years).A SIMPLE IRA will not be treated as violating any of the applicable limitations of Section 408(p) merely on account of the making of (or right to make) catch-up contributions, provided a universal availability requirement is met..IRC Sec. 414(v)(3); see Prop. Treas. Reg. §1.414(v)-1(d). See Q 3729 for details on the requirements for catch-up contributions.Elective contribution amounts made under the salary reduction portion (i.e., those subject to the $12,500 limit) of a SIMPLE IRA plan are counted in the overall limit ($18,000 in 2016) on elective deferrals by any individual..IRC Sec. 402(g)(3)(D); IR-2015-118. See Q 3728 for the definition of “elective deferral.” Thus, for example, an individual under age 50 who defers the maximum of $12,500 to a SIMPLE IRA of one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $5,500 in 2016 ($18,000 - $12,500) to the 401(k) plan..IR-2015-118. Catch-up contributions are not subject to the limits of IRC Section 402(g) and do not reduce an individual’s otherwise applicable deferral limit under any other plan..IRC Sec. 414(v)(3)(A).DefinitionsAn arrangement will not be treated as a qualified salary reduction arrangement if the employer, or a predecessor employer, maintained another qualified plan (including a 403(a) annuity, a 403(b) tax sheltered annuity, a SEP, or a governmental plan other than an IRC Section 457 plan) under which contributions were made or benefits accrued for service during any year in which the SIMPLE IRA plan was in effect. But if only employees other than those covered under a collectively bargained agreement are eligible to participate in the SIMPLE IRA plan, this rule will be applied without regard to a collectively bargained plan..IRC Sec. 408(p)(2)(D). Also, for purposes of this rule, transfers, rollovers, or forfeitures are disregarded except to the extent that forfeitures replace otherwise required contributions..Notice 98-4, 1998-1 CB 269.Only an eligible employer may adopt a SIMPLE IRA plan. An “eligible employer” is defined as an employer who employed no more than 100 employees earning at least $5,000 from the employer during the preceding year..IRC Sec. 408(p)(2)(C)(i). For purposes of this limitation, all employees employed at any time during the calendar year are taken into account, even those who are excludable or are ineligible to participate. Furthermore, certain self-employed individuals who receive earned income from the employer during the year must be counted for purposes of the 100-employee limitation..Notice 98-4, 1998-1 CB 269. An employer who maintains a plan in which only collectively bargained employees may participate is not precluded from offering a SIMPLE IRA to its noncollectively bargained employees..IRC Sec. 408(p)(2)(D)(i).Generally, an eligible employer who ceases to be eligible after having established and maintained a SIMPLE IRA plan for at least one year will, nonetheless, continue to be treated as eligible for the following two years..IRC Sec. 408(p)(2)(C)(i)(II). But special rules apply where a failure to remain eligible (or to meet any other requirement of IRC Section 408(p)) was due to an acquisition, disposition, or similar transaction involving another eligible employer..See IRC Sec. 408(p)(10).Compensation, for purposes of most of the SIMPLE IRA provisions, includes wages (as defined for income tax withholding purposes), elective contributions made under a SIMPLE IRA plan, and elective deferrals, including compensation deferred under an IRC Section 457 plan..IRC Sec. 408(p)(6)(A). A self-employed individual who is treated as an employee may be a participant in a SIMPLE IRA plan; for this purpose, “compensation” means net earnings from self-employment, prior to subtracting the SIMPLE IRA plan contribution..IRC Sec. 408(p)(6)(A)(ii). An employee’s elective deferrals under a 401(k) plan, a SAR-SEP, and a Section 403(b) annuity contract are also included in the meaning of compensation for purposes of the 100-employee limitation (i.e., the $5,000 threshold) and the eligibility requirements..Notice 98-4, 1998-1 CB 269.