Simple IRA Rules

by Peter Neeves ; Updated July 27, 2017

Contribution Limits

The IRS has set employee contribution limits at $12,500 for 2015. These limits are indexed for cost of living and increase annually. Catch-up contributions also are allowed for employees 50 and older. The catch up contribution limit for 2015 is $3,000. If an employee participates in another retirement plan, such as one with another employer, the total combined contributions are limited to $18,000 as of 2015.

Employer Contributions

Employers have two options for contributions to a SIMPLE IRA -- matching contributions or non-elective contributions.

Matching Contributions

If the employer elects to make matching contributions then the employer must match employee contributions up to 3 percent of each employee's wages. For example, if the employee contributes 2 percent, the employer also must contribute 2 percent; if the employee contributes 4 percent then the employer must match only the first 3 percent. Employers are allowed to make reduced contributions. Reduced contributions must be at least a match of the first 1 percent Reduced matching cannot be done more than two out of five years, and the employer must provide notice to the employees in advance of the open enrollment period.

Non-Elective Contributions

Instead of matching contributions the employer may make non-elective contributions. Non-elective contributions are not matching, and must be made for all eligible employees, whether or not they are making contributions themselves. These contributions are set at 2 percent of an employee's wages.

Deadlines

SIMPLE IRAs work on a calendar year, rather than the businesses' fiscal year. Employers can start a SIMPLE IRA anytime between January 1 and October 1. Each year, employees must have an open enrollment window where they can stop, start, or change contributions. This window must be at least 60 days.

Tax Treatment

SIMPLE IRAs are funded with tax-deferred contributions. The employee is not subject to current income tax on their contributions, although FICA taxes are withheld. Earnings grow tax-deferred and the employee is not subject to tax on these funds until withdrawal, generally in retirement. Employees own both their own contributions and the employer's contributions -- there is no vesting period for either. This means the employee can take all the investment with them if they leave or change employers.

References

About the Author

Based in upstate New York, Peter Neeves began writing for Demand Studios in 2009, and has a background writing corporate training materials. Neeves attained his Master of Business Administration from IONA College, where he received the Joseph G. McKenna award for academic excellence. He is currently pursuing a Ph.D. at Walden University.