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.
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