Savings Incentive Match Plan for Employees, Features, Establishing, Deadlines

18/12/2023 1 By indiafreenotes

Savings Incentive Match Plan for Employees, commonly known as a SIMPLE IRA, is a retirement savings plan that small businesses can offer to their employees. The SIMPLE IRA is designed to be an uncomplicated and cost-effective way for employers with fewer than 100 employees to provide retirement benefits. The SIMPLE IRA is an accessible and straightforward retirement savings option for small businesses and their employees. Its design makes it an attractive choice for employers seeking to provide retirement benefits without the administrative complexity associated with some other retirement plans. Both employers and employees can benefit from the tax advantages and immediate vesting offered by the SIMPLE IRA. As regulations may evolve, it’s advisable to consult with a financial advisor or tax professional for the most up-to-date information regarding SIMPLE IRA plans.


  1. Eligibility:

Employers with 100 or fewer employees who earned $5,000 or more in the preceding calendar year can establish a SIMPLE IRA.

  1. Employee Contributions:

Employees can make salary deferral contributions to their SIMPLE IRA. The maximum contribution limit is $14,000 (2022), with a catch-up contribution of up to $3,000 for employees aged 50 or older.

  1. Employer Contributions:

    • Employers are required to make contributions to the SIMPLE IRAs. They can choose between:
      • A dollar-for-dollar match of employee contributions up to 3% of the employee’s compensation.
      • A non-elective contribution of 2% of each eligible employee’s compensation (up to a certain limit).
  1. Immediate Vesting:

Contributions made by both employees and employers are immediately 100% vested, meaning employees have ownership of the funds from the start.

  1. Tax Advantages:

Employee contributions are made on a pre-tax basis, meaning they are tax-deductible. Employer contributions are also tax-deductible business expenses.

  1. Withdrawals:

Withdrawals from a SIMPLE IRA are subject to specific rules. Early withdrawals (before age 59½) may be subject to a 10% early withdrawal penalty, with certain exceptions.

  1. Simplified Administration:

SIMPLE IRAs are designed to be easy to administer, with fewer administrative requirements compared to some other retirement plans.

  1. No Discrimination Testing:

SIMPLE IRAs are not subject to the complex nondiscrimination testing that applies to some other types of retirement plans.

Establishing a SIMPLE IRA:

  1. Notification:

Employers are required to provide employees with information about the SIMPLE IRA plan, including the chosen contribution formula, and the opportunity to make salary deferral contributions.

  1. Form 5304-SIMPLE or 5305-SIMPLE:

Employers can use IRS Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. These forms outline the terms and conditions of the plan.

  1. Financial Institution:

Employers must choose a financial institution to serve as the trustee or custodian for the SIMPLE IRA accounts.

  1. Salary Reduction Agreement:

Employees must complete a salary reduction agreement to specify the amount of their salary deferral contributions.

Deadlines and Contributions:

  1. Establishment Deadline:

Employers can set up a SIMPLE IRA plan between January 1 and October 1 of the calendar year. For businesses established after October 1, the plan can be set up as soon as administratively feasible.

  1. Employee Contributions:

Employees can make salary deferral contributions throughout the year, and employers must deposit these contributions within 30 days after the end of the month in which the money was withheld.

  1. Employer Contributions:

Employers have until their tax filing deadline, including extensions, to make their matching or non-elective contributions.

Conversion and Rollover:

  1. Rollovers:

Employees can roll over funds from other qualified retirement plans into a SIMPLE IRA.

  1. Conversion:

SIMPLE IRAs can be converted into Traditional IRAs, but certain rules and waiting periods may apply.