Publication 535 |
2001 Tax Year |
SIMPLE Retirement Plans
A Savings Incentive Match Plan for Employees (SIMPLE plan) is a
written arrangement that provides you and your employees with a
simplified way to make contributions to provide retirement income.
Under a SIMPLE plan, employees can choose to make salary reduction
contributions to the plan rather than receiving these amounts as part
of their regular pay. In addition, you will contribute matching or
nonelective contributions.
SIMPLE plans can only be maintained on a calendar-year basis.
A SIMPLE plan can be set up in either of the following ways.
- Using SIMPLE IRAs (SIMPLE IRA plan).
- As part of a 401(k) plan (SIMPLE 401(k) plan).
See Publication 560
for information on SIMPLE 401(k) plans.
Many financial institutions will help you set up a SIMPLE plan.
SIMPLE IRA Plan
A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for
each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be
set up for each eligible employee. For the definition of an eligible
employee, see Who Can Participate in a SIMPLE IRA Plan,
next.
Who Can Set Up
a SIMPLE IRA Plan?
You can set up a SIMPLE IRA plan if you meet both the following
requirements.
- You meet the employee limit.
- You do not maintain another qualified plan unless the other
plan is for collective bargaining employees.
Employee limit.
You can set up a SIMPLE IRA plan only if you had 100 or fewer
employees who received $5,000 or more in compensation from you for the
preceding year. Under this rule, you must take into account all
employees employed at any time during the calendar year
regardless of whether they are eligible to participate. Employees
include self-employed individuals who received earned income, and
leased employees.
Once you set up a SIMPLE IRA plan, you must continue to meet the
100-employee limit each year you maintain the plan.
Grace period for employers who cease to meet the 100-employee
limit.
If you maintain the SIMPLE IRA plan for at least 1 year and you
cease to meet the 100-employee limit in a later year, you will be
treated as meeting it for the 2 calendar years immediately following
the calendar year for which you last met it.
A different rule applies if you do not meet the 100-employee limit
because of an acquisition, disposition, or similar transaction. Under
this rule, the SIMPLE IRA plan will be treated as meeting the
100-employee limit for the year of the transaction and the 2 following
years if both the following conditions are satisfied.
- Coverage under the plan has not significantly changed during
the grace period.
- The SIMPLE IRA plan would have continued to qualify after
the transaction if you had remained a separate employer.
The grace period for acquisitions, dispositions, and similar
transactions also applies if, because of these types of transactions,
you do not meet the rules explained under Other qualified plan,
next, or Who Can Participate in a SIMPLE IRA Plan,
later.
Other qualified plan.
The SIMPLE IRA plan generally must be the only retirement plan to
which you make contributions, or benefits accrue, for service in any
year beginning with the year the SIMPLE IRA plan becomes effective.
Exception.
If you maintain a qualified plan for collective bargaining
employees, you are permitted to maintain a SIMPLE IRA plan for other
employees.
Who Can Participate
in a SIMPLE IRA Plan?
Eligible employee.
Any employee who received at least $5,000 in compensation during
any 2 years preceding the current calendar year and is reasonably
expected to receive at least $5,000 during the current calendar year
is eligible to participate. The term "employee" includes a
self-employed individual who received earned income.
You can use less restrictive eligibility requirements (but not more
restrictive ones) by eliminating or reducing the prior year
compensation requirements, the current year compensation requirements,
or both. For example, you can allow participation for employees who
received at least $3,000 in compensation during any preceding calendar
year. However, you cannot impose any other conditions on participating
in a SIMPLE IRA plan.
Excludable employees.
The following employees do not need to be covered under a SIMPLE
IRA plan.
- Employees who are covered by a union agreement and whose
retirement benefits were bargained for in good faith by the employees'
union and you.
- Nonresident alien employees who have received no U.S. source
wages, salaries, or other personal services compensation from
you.
Compensation.
Compensation for employees is the total wages required to be
reported on Form W-2. Compensation also includes the salary
reduction contributions made under this plan, compensation deferred
under a section 457 plan, and the employees' elective deferrals under
a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract.
If you are self-employed, compensation is your net earnings from
self-employment (line 4 of Short Schedule SE (Form 1040)) before
subtracting any contributions made to the SIMPLE IRA plan for
yourself.
How To Set Up a SIMPLE IRA Plan
You can use Form 5304-SIMPLE
or Form
5305-SIMPLE
to set up a SIMPLE
IRA plan. Each form is a model savings incentive match plan for
employees (SIMPLE) plan document. Which form you use depends on
whether you select a financial institution or your employees select
the institution that will receive the contributions.
Use Form 5304-SIMPLE if you allow each plan participant to
select the financial institution for receiving his or her SIMPLE IRA
plan contributions. Use Form 5305-SIMPLE if you require that all
contributions under the SIMPLE IRA plan be deposited initially at a
designated financial institution.
The SIMPLE IRA plan is adopted when you (and the designated
financial institution, if any) have completed all appropriate boxes
and blanks on the form and you have signed it. Keep the original form.
Do not file it with the IRS.
Other uses of the forms.
If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or
Form 5305-SIMPLE, you can use the form to satisfy other
requirements, including the following.
- Meeting employer notification requirements for the SIMPLE
IRA plan. Page 3 of Form 5304-SIMPLE and Page 3 of Form
5305-SIMPLE contain a Model Notification to Eligible
Employees that provides the necessary information to the
employee.
- Maintaining the SIMPLE IRA plan records and proving you set
up a SIMPLE IRA plan for employees.
Deadline for setting up a SIMPLE IRA plan.
You can set up a SIMPLE IRA plan effective on any date between
January 1 and October 1 of a year, provided you did not previously
maintain a SIMPLE IRA plan. If you previously maintained a SIMPLE IRA
plan, you can set up a SIMPLE IRA plan effective only on January 1 of
a year. This requirement does not apply if you are a new employer that
comes into existence after October 1 of the year the SIMPLE IRA plan
is set up and you set up a SIMPLE IRA plan as soon as administratively
feasible after you come into existence. A SIMPLE IRA plan cannot have
an effective date that is before the date you actually adopt the plan.
Setting up a SIMPLE IRA.
SIMPLE IRAs are the individual retirement accounts or annuities
into which the contributions are deposited. A SIMPLE IRA must be set
up for each eligible employee. Forms 5305-S,
SIMPLE Individual
Retirement Trust Account, and 5305-SA,
SIMPLE Individual
Retirement Custodial Account, are model trust and custodial
account documents the participant and the trustee (or custodian) can
use for this purpose.
A SIMPLE IRA cannot be designated as a Roth IRA. Contributions to a
SIMPLE IRA will not affect the amount an individual can contribute to
a Roth IRA.
Deadline for setting up a SIMPLE IRA.
A SIMPLE IRA must be set up for an employee before the first date
by which a contribution is required to be deposited into the
employee's IRA. See Time limits for contributing funds
later under Contribution Limits.
Notification Requirement
If you adopt a SIMPLE IRA plan, you must notify each employee of
the following information before the beginning of the election period.
- The employee's opportunity to make or change a salary
reduction choice under a SIMPLE IRA plan.
- Your choice to make either reduced matching contributions or
nonelective contributions (discussed later).
- A summary description and the location of the plan. The
financial institution should provide you with this information.
- Written notice that his or her balance can be transferred
without cost or penalty if you use a designated financial
institution.
Election period.
The election period is generally the 60-day period immediately
preceding January 1 of a calendar year (November 2 to December 31 of
the preceding calendar year). However, the dates of this period are
modified if you set up a SIMPLE IRA plan in mid-year (for example, on
July 1) or if the 60-day period falls before the first day an employee
becomes eligible to participate in the SIMPLE IRA plan.
A SIMPLE IRA plan can provide longer periods for permitting
employees to enter into salary reduction agreements or to modify prior
agreements. For example, a SIMPLE IRA plan can provide a 90-day
election period instead of the 60-day period. Similarly, in addition
to the 60-day period, a SIMPLE IRA plan can provide quarterly election
periods during the 30 days before each calendar quarter, other than
the first quarter of each year.
Contribution Limits
Contributions are made up of salary reduction contributions and
employer contributions. You, as the employer, must make either
matching contributions or nonelective contributions, discussed later.
No other contributions can be made to the SIMPLE IRA plan. These
contributions, which you can deduct, must be made timely. See
Time limits for contributing funds, later.
Salary reduction contributions.
The amount the employee chooses to have you contribute to a SIMPLE
IRA on his or her behalf cannot be more than $6,500 for 2001. These
contributions must be expressed as a percentage of the employee's
compensation unless you permit the employee to express them as a
specific dollar amount. You cannot place restrictions on the
contribution amount (such as limiting the contribution percentage),
except to comply with the $6,500 limit.
If an employee is a participant in any other employer plan during
the year and has elective salary reductions or deferred compensation
under those plans, the salary reduction contributions under a SIMPLE
IRA plan also are elective deferrals that count toward the overall
$10,500 annual limit on exclusion of salary reductions and other
elective deferrals.
If the other plan is a deferred compensation plan of a state or
local government or a tax-exempt organization, the limit on elective
deferrals is $8,500.
Employer matching contributions.
You are generally required to match each employee's salary
reduction contributions on a dollar-for-dollar basis up to 3% of the
employee's compensation. This requirement does not apply if you make
nonelective contributions as discussed later.
Example.
In 2001, your employee, John Rose, earned $25,000 and chose to
defer 5% of his salary. You make a 3% matching contribution. The total
contribution you can make for John is $2,000, figured as follows.
Salary reduction
contributions
($25,000 × .05) |
$1,250 |
Employer matching
contribution
($25,000 × .03) |
750 |
Total
contributions |
$2,000 |
Lower percentage.
If you choose a matching contribution less than 3%, the percentage
must be at least 1%. You must notify the employees of the lower match
within a reasonable period of time before the 60-day election period
(discussed earlier) for the calendar year. You cannot choose a
percentage less than 3% for more than 2 years during the 5-year period
that ends with (and includes) the year for which the choice is
effective.
Nonelective contributions.
Instead of matching contributions, you can choose to make
nonelective contributions of 2% of compensation on behalf of each
eligible employee who has at least $5,000 of compensation (or some
lower amount of compensation that you select) from you for the year.
If you make this choice, you must make nonelective contributions
whether or not the employee chooses to make salary reduction
contributions. Only $170,000 of the employee's compensation can be
taken into account to figure the contribution limit.
If you choose this 2% contribution formula, you must notify the
employees within a reasonable period of time before the 60-day
election period (discussed earlier) for the calendar year.
Example 1.
In 2001, your employee, Jane Wood, earned $36,000 and chose to have
you contribute 10% of her salary. You make a 2% nonelective
contribution. The total contributions you can make for her are $4,320,
figured as follows.
Salary reduction
contributions
($36,000 × .10) |
$3,600 |
2% nonelective
contributions
($36,000 × .02) |
720 |
Total
contributions |
$4,320 |
Example 2.
Using the same facts as in Example 1, above, the maximum
contribution you can make for Jane if she earned $75,000 is $8,000,
figured as follows.
Salary reduction
contributions
(maximum amount) |
$6,500 |
2% nonelective
contributions
($75,000 × .02) |
1,500 |
Total
contributions |
$8,000 |
Time limits for contributing funds.
You must make the salary reduction contributions to the SIMPLE IRA
within 30 days after the end of the month in which the amounts would
otherwise have been payable to the employee in cash. You must make
matching contributions or nonelective contributions by the due date
(including extensions) for filing your federal income tax return for
the year.
When To Deduct Contributions
You can deduct SIMPLE IRA contributions in the tax year with or
within which the calendar year for which contributions were made ends.
You can deduct contributions for a particular tax year if they are
made for that tax year and are made by the due date (including
extensions) of your federal income tax return for that year.
Example 1.
Your tax year is the fiscal year ending June 30. Contributions
under a SIMPLE IRA plan for the calendar year 2001 (including
contributions made in 2001 before July 1, 2001) are deductible in the
tax year ending June 30, 2002.
Example 2.
You are a sole proprietor whose tax year is the calendar year.
Contributions under a SIMPLE IRA plan for the calendar year 2001
(including contributions made in 2002 by April 15, 2002) are
deductible in the 2001 tax year.
Where To Deduct Contributions
Deduct contributions you make for your common-law employees on your
tax return. For example, sole proprietors deduct them on Schedule C
(Form 1040) or Schedule F (Form 1040), partnerships deduct them on
Form 1065, and corporations deduct them on Form 1120, Form
1120-A, or Form 1120S.
Sole proprietors and partners deduct contributions for themselves
on line 29 of Form 1040. (If you are a partner, contributions for
yourself are shown on the Schedule K-1 (Form 1065) you receive
from the partnership).
Tax Treatment of Contributions
You can deduct your contributions and your employees can exclude
these contributions from their gross income. SIMPLE IRA contributions
are not subject to federal income tax withholding. However, salary
reduction contributions are subject to social security, Medicare, and
federal unemployment (FUTA) taxes. Matching and nonelective
contributions are not subject to these taxes.
Reporting on Form W-2.
Do not include SIMPLE IRA contributions in the "Wages, tips,
other compensation" box of Form W-2. However, salary
reduction contributions must be included in the boxes for social
security and Medicare wages. Also include the proper code in Box 12.
For more information, see the instructions for Forms W-2 and
W-3.
Distributions (Withdrawals)
Distributions from a SIMPLE IRA are subject to IRA rules and
generally are includible in income for the year received. Tax-free
rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. A
rollover from a SIMPLE IRA to another IRA can be made tax free only
after a 2-year participation in the SIMPLE IRA plan.
Early withdrawals generally are subject to a 10% additional tax.
However, the additional tax is increased to 25% if funds are withdrawn
within 2 years of beginning participation.
More information.
See Publication 590
for information about IRA rules, including
those on the tax treatment of distributions, rollovers, required
distributions, and income tax withholding.
More Information
on SIMPLE IRA Plans
If you need more help to set up and maintain a SIMPLE IRA plan, see
the following IRS notice and revenue procedure.
Notice 98-4.
This notice contains questions and answers about the implementation
and operation of SIMPLE IRA plans, including the election and notice
requirements for these plans. Notice 98-4 is in Cumulative
Bulletin 1998-1.
Revenue Procedure 97-29.
This revenue procedure provides guidance to drafters of prototype
SIMPLE IRAs on obtaining opinion letters. Revenue Procedure
97-29 is in Cumulative Bulletin 1997-1.
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