What is a SIMPLE IRA?

What is a SIMPLE IRA?

Simple IRA stands for Savings Incentive Match Plans for Employees (SIMPLE). A SIMPLE IRA is sometimes called a SIMPLE Plan, SIMPLE program, or SIMPLE retirement plan or even salary reduction agreement.

Definition of SIMPLE IRA

The IRS defines a SIMPLE IRA plan as a tax favored retirement plan that certain small employers including self employed individuals can sep up for the benefit of their employees.

A SIMPLE retirement plan is a written agreement or a salary deduction agreement between an employee and an employer that allows eligible employee or self employed business owner to choose to:

• reduce his or her salary or compensation each pay period by a certain percentage, and

   

• have the employer contribute the salary deductions to a SIMPLE IRA or the employee's behalf. SIMPLE IRA contributions are sometimes called salary reduction contributions.

What is the definition of eligible employees for SIMPLE IRA purposes?

Only eligible employees can contribute and participate in the SIMPLE IRA plan set up by the small business employer. Employees that are eligible to participate in the SIMPLE IRA plan must be allowed to participate. In general, employees are eligible if they:

• received at least $5,000 in compensation from the employer in the past 2 years prior to the current tax year

   

• are reasonably expected to receive at least $5,000 in compensation during the calendar year which the SIMPLE IRA contributions are made

What is a SIMPLE IRA for self employed people?

Usually self employed people open SEP IRAs instead of SIMPLE IRAs. However, if a self employed individual wants to open a SIMPLE IRA, he or she can if he or she received earned income. For the purpose of SIMPLE IRA eligibility, a self employed person is considered an employee.

What is compensation for SIMPLE IRA?

To qualify to participate in a SIMPLE IRA plan, the employee must have certain level of compensation where compensation includes:

• wages, tips and other pay from the employer that are subject to income tax withholding

   

• deferred amounts elected under any 401k plans, 403b plans, government section 457 plans, SEP IRA plans, or SIMPLE IRA plans.