Employers often establish a retirement plan called the SIMPLE IRA in their firm with the intention of benefitting the employees. SIMPLE stands for Savings Incentive Match Plan for Employees and IRA stands for Individual Retirement Account. Employees who are eligible for SIMPLE IRA are allowed to make their contribution to their accounts. The amount that the employees contribute is a part of their pretax compensation. Therefore, there is no tax applicable on the amount that the employees contribute until the amount is distributed. The term used for the contribution to SIMPLE IRA is called an elective-deferral or salary reduction contribution.

Employees can make only two types of contribution, namely matching contributions and nonelective contributions. Matching contributions are based on the elective-deferral contribution made by the employees, and nonelective contributions are paid to the employees irrespective of the employees’ reduction made on the salary for the contribution to the plan.

Employees get a significant source of income through the SIMPLE IRA plans at their retirement by setting aside money in their retirement accounts. Unlike conventional retirement plans, there are no start-up and operating costs associated with SIMPLE IRA plans.

Some characteristics of SIMPLE IRA plans include the following.

• They are available to small business of any type with less than or equal to 100 employees.
• Firms can easily establish SIMPLE IRA plans by incorporating Form 5304-SIMPLE, 5303-SIMPLE, a customized or individually designed plan document, or a SIMPLE IRA prototype.
• Once a firm has incorporated SIMPLE IRA contribution plan, it cannot have any other retirement plans for its employees.
• A SIMPLE IRA plan does not require the firm or employer to do any filing.
• There are two types of contributions. The employer has to contribute each year. The contribution can either be 3% (matching contribution) of the employees’ compensation or 2% nonelective contribution for the employees who are eligible for SIMPLE IRA plan.
• The nonelective SIMPLE IRA contribution allows an eligible employee to not contribute their SIMPLE IRA and still get a 2% of their compensation contribution from the employer. The contribution made by the employer to the employee’s SIMPLE IRA plan is equal to 2% of the employee’s compensation up to the annual limit of $275,000 for the year 2018. This amount is subject to later years’ cost-of-living adjustments.
• Contribution to the SIMPLE IRA plans is optional for the employees.
• Even if the employee is not contributing to their SIMPLE IRA plan, they are 100% vested in all SIMPLE IRA money.

SIMPLE IRA contribution limit
As mentioned earlier, SIMPLE IRA includes employer contribution (matching and nonelective contributions) and salary reduction contribution. There are SIMPLE IRA contribution limits for both the types of contributions.

Salary reduction contributions
The employees’ limit for their SIMPLE IRS contribution is $12,500 for the years 2015, 2016, 2017, and 2018. If an employee participates in another employer’s plan in a given year and has a certain amount of salary reduction under those plans, then the total amount of reduction the employee can make to the other plans that they have participated cannot exceed $18,500 for the year 2018.

Catch-up contributions
If an employee who is over the age of 50 years, or is at the end of the calendar year and is permitted by the SIMPLE IRA plan, they can still make catch-up contributions. However, the SIMPLE IRA contribution limit becomes $3000 in these cases.

Employer matching contributions
In matching contributions, the employer has to match each employee’s salary reduction contribution. This contribution is on a dollar-for-dollar basis and is up to 3% of the employee’s compensation. The matching contribution is only applicable as long as the employee has opted for the salary reduction option. It will not be applicable in the employer makes a nonelective contribution.

An employer can choose to make a matching contribution lower than 3%, but they cannot go below 1%, and if it is 1%, then that contribution cannot be for more than 2 out of 5 years. The employer needs to notify the employees about the lower match within a reasonable period.

Nonelective contributions
If an employee does not want to make salary reductions contributions to their SIMPLE IRA plan, they can opt for nonelective contribution where the employer contributes 2% of the eligible employee’s compensation. The compensation of an employee is taken into account to figure the SIMPLE IRA contribution limit for the employer.

In case there are miscalculations regarding the SIMPLE IRA contribution and its limits, there are provisions for the employees and the employer to rectify the mistake or miscalculations.

SIMPLE IRA contribution time limits
The employer must deposit the employees’ salary reduction contributions to their SIMPLE IRA plan within 30 days post the month’s end in which the employee would have received the amount in cash. There are due dates for both type of contributions (matching and nonelective), and the employers must deposit the contributions before or by the due date.