What Is a SIMPLE Plan?

A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. See Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan.

A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to:

• Reduce your compensation by a certain percentage each pay period, and
• Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. These contributions are called salary reduction contributions.

All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Contributions are made on behalf of eligible employees. (See Eligible Employees, later.) Contributions are also subject to various limits. (See How Much Can Be Contributed on My Behalf, later.)

In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. See How Are Contributions Made, later.

Eligible Employees

You must be allowed to participate in your employer's SIMPLE plan if you:

• Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and
• Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made.

Self-employed individual. For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income.

Excludable employees. Your employer can exclude the following employees from participating in the SIMPLE plan.

• Employees whose retirement benefits are covered by a collective bargaining agreement (union contract).
• Employees who are nonresident aliens and received no earned income from sources within the United States.
• Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year.

Compensation. For purposes of the SIMPLE plan rules, your compensation for a year generally includes the following amounts.

• Wages, tips, and other pay from your employer that is subject to income tax withholding.
• Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457(b)) plans, SEP plans, and SIMPLE plans.

Self-employed individual compensation. For purposes of the SIMPLE plan rules, if you are self-employed, your compensation for a year is your net earnings from self-employment (line 4, Section A of Schedule SE (Form 1040)) before subtracting any contributions made to a SIMPLE IRA on your behalf.

Beginning after 2001, for purposes of the limit on deductions for contributions to a self-employed person's SEP-IRA, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits.

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