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Small Business - Frequently Asked Questions

SIMPLE IRA

What is a SIMPLE IRA?

How does it work?

What are the advantages of a SIMPLE IRA plan?

What is the adoption deadline for a SIMPLE IRA plan?

Are SIMPLE IRA plans maintained on a calendar-year or fiscal-year basis?

Does participation in a SIMPLE IRA plan affect other IRA contributions?

Who is eligible for a SIMPLE IRA plan?

Do all employees have to be covered?

Is there an age requirement for SIMPLE IRA contributions?

How much can be contributed to a SIMPLE IRA?

What is the deadline for SIMPLE IRA contributions?

What are the penalties for early distributions?

Are the employer's matching or non-elective contributions treated as income on the employee's tax return?

Are there required distributions for SIMPLE IRAs?

Can funds be rolled over or transferred from a SIMPLE IRA to another IRA?

When are employees vested in the funds?

What is a SIMPLE IRA?

A SIMPLE IRA is a retirement plan created to help eligible small businesses with 100 or fewer employees offer their employees a simple, effective way to plan for retirement without burdening the business with complicated paperwork and procedures.
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How does it work?

It lets you and your employees defer a portion of your pay and invest it in a tax-deferred retirement account, much like a 401(k). You, the employer, make tax-deductible contributions (either matching or non-elective) to help your employees achieve their retirement goals.
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What are the advantages of a SIMPLE IRA plan?

Similar to other tax-deferred retirement plans, funds in the account are not taxed until the employee withdraws them. Employers receive important tax deductions for both employee deferrals and their own matching contributions. SIMPLE IRA plans are also easier to set up and more economical to administer than a 401(k) plan.
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What is the adoption deadline for a SIMPLE IRA plan?

An existing employer may open a SIMPLE IRA plan for a tax year on any date between January 1 and October 31 of that year.
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Are SIMPLE IRA plans maintained on a calendar-year or fiscal-year basis?

SIMPLE IRA plans must be maintained on a calendar-year basis.
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Does participation in a SIMPLE IRA plan affect other IRA contributions?

Employees who participate in a SIMPLE IRA plan are active participants in an employer-sponsored retirement plan. Ability to contribute to an IRA is not affected. However, the deductibility of Traditional IRA contributions may be affected, depending on income.
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Who is eligible for a SIMPLE IRA plan?

Small business employers (including self-employed individuals) that have 100 or fewer employees and that do not maintain any other qualified plan are eligible to establish a SIMPLE IRA. Eligible employees are those who have received compensation of at least $5,000 in any two preceding years and who reasonably expect to receive at least $5,000 in the current calendar year. (Note: Employers may choose more liberal eligibility requirements. However, if a SIMPLE IRA plan is established, it must be open to every eligible employee.)
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Do all employees have to be covered?

An employer may place some limitations on employee eligibility for participation in a SIMPLE IRA plan. However, employees cannot be excluded if they have earned at least $5,000 in any two preceding years and reasonably expect to earn at least $5,000 in the current calendar year. The employer may waive or set less restrictive eligibility requirements and may exclude certain union employees or nonresident aliens from participation in the program.
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Is there an age requirement for SIMPLE IRA contributions?

No.
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How much can be contributed to a SIMPLE IRA?

Employees may contribute a specified percentage of their income, up to a maximum of $12,000 in tax year 2013 ($14,500 for those age 50 and older).

Employer contributions are mandatory. Employers can make contributions for their employees in one of three following ways:

  • 100% matching up to 3% of the employee's compensation
  • Make non-elective contributions of 2% of compensation for all eligible employees who have earned at least $5,000 during the year (including those who choose not to participate in the plan)
  • As low as 1% of employee compensation (Can be chosen up to 2 times in a five-year period)
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What is the deadline for SIMPLE IRA contributions?

The employer must deposit employee elective deferrals no later than 30 days after the close of the month in which the deferral is taken from the employee's pay. The deadline for employer matching or non-elective contributions is the employer's tax return due date (including extensions).
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What are the penalties for early distributions?

Distributions taken prior to age 59 1/2 are generally subject to early-withdrawal penalties; during the first two years of participation in a SIMPLE IRA, they are subject to a 25 percent penalty; after two years of participation, the penalty amount decreases to 10 percent.
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Are the employer's matching or non-elective contributions treated as income on the employee's tax return?

No.
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Are there required distributions for SIMPLE IRAs?

The first year's distribution must be received by April 1 of the year following the year the employee reaches age 70 1/2 and annually thereafter by December 31.
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Can funds be rolled over or transferred from a SIMPLE IRA to another IRA?

To qualify as a tax-free rollover, a rollover distribution (or a transfer) made from a SIMPLE IRA requires a minimum two years of participation in the employer's plan. The two-year period begins on the first day on which employer contributions are deposited into the SIMPLE IRA. Tax-free rollovers can be made to:

  • Another SIMPLE IRA
  • A qualified plan
  • A tax-sheltered annuity (Section 403[b] plan)
  • A state or local government deferred compensation plan (Section 457 plan)

Consult your tax advisor for more information.
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When are employees vested in the funds?

Participants are immediately 100 percent vested in both their deferral contributions and the employer's contributions.
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