SIMPLE IRA

What is a SIMPLE IRA Account

Simple IRA meaning

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a workplace retirement plan for small companies (100 or fewer eligible employees who earned at least $5,000 in the previous year). Simply put, it’s a small company’s version of 401k.

It allows both small business employers (which is mandatory) and its eligible employees to make tax-deferred contributions to the retirement plan.

Salient features of SIMPLE IRA include:

• Suitable to firms with 100 employees or less
• Employers make savings to individual accounts belonging to eligible workers.
• Workers can defer their salaries into their retirement accounts.
• Contributions can be both from the employers and employees.
• Savings are 100% vested in the employees.

How a SIMPLE IRA works

• Employer Executes SIMPLE plan model documents (Elective Deferral Agreement).
• Employer provides certain information regarding the agreement together with an annual notice to all eligible employees.
• Individual IRA accounts will be set up with an authorized financial institution.
• After the setup, the employer makes mandatory contributions, while the employee’s contribution is voluntary. These pre-tax savings are made at the payroll level.
• Employers can match either elective dollar-for-dollar contributions of 1% to 3% of the employee’s pay. The employee has to contribute or forfeit the employer’s match. Alternatively, the employer can make non-elective contributions equal to 2% of pay, regardless of employees’ savings (capped at $305,000 in 2022 for high earners).
•  Account-holders choose where the money gets invested.
• Funds are 100% vested immediately.

Who is eligible for SIMPLE IRA

For eligibility for a SIMPLE IRA, the employer and his employees must meet this criterion:

Employer Eligibility.

• Available to employers with 100 employees or fewer and do not have alternative retirement plans. Unionized employees are an exception to this rule.
• Must make elective or non-elective Contributions to employee accounts every year. The employer can alternate between the two as long as they provide notice.
• Ensure that rules and guidelines for employee eligibility are applied identically to all employees with the exception of employees receiving union benefits and non-resident alien employees.
• Inform employees of eligibility with an annual written reminder of your eligibility at least 60 days before the start of each year.
• SIMPLE IRA plans must be established between January 1 and October 1 of any tax year. The only exception is if the business was established after October 1.

Employee Eligibility.

• Employees are automatically eligible if they have received at least $5,000 in earnings in any of the two previous calendar years (do not have to be consecutive) and are expecting to earn the same in the current year. Employers are allowed to set more or less stringent requirements if they so wish.

Contributions to SIMPLE IRA

SIMPLE IRA 2022 contribution limit IRS

SIMPLE IRA plans are funded both by employee deferrals and employer matching contributions.

Employer:

Mandatory and can be paid in two methods

• Dollar for dollar 3% matching contribution(not capped by annual compensation limits) or
• 2% non-elective contribution up to $6,100 in 2022($5,800 for 2021).In this option, employees do not make savings themselves. This is capped at $305,000 in 2022($290,000 in 2021) for highly paid employees.

Participants:

• Up to a maximum of $14,000 for 2022($13,500 for 2021) – This limit is applicable both for employer and employee savings.
• Catch up of $3,000 for participants aged 50 or older(Same for 2021)

Deadline for SIMPLE IRA contributions

• New plans must be set up and employees notified by October 1.
• Deferrals and matches must be contributed monthly (within 30 days after the end of the month its payable to the employee).
• Employer matching contributions must be made annually. This should not be later than the employer’s tax filing deadline including extensions, usually around April 15.

Benefits of SIMPLE IRA

For Employers:

• Acts as a Morale booster as it helps employees plan their retirement
• A low-cost retirement plan funded mainly by employees
• Business expense deductions for employee contributions
• Easy administration with no tax filing
• Retirement planning tools and resources

For Participants:

• Employers must contribute to employee accounts
• Employees don’t need to sign up for salary deferrals to get employers’ matches (in the case of non-elective 2% contribution)
• Tax-deferred earnings
• Participants can make Pre-tax savings(salary deferrals)
• Immediate vesting of funds
• Individuals can complement their retirement plans with savings to other retirement plans at the same time.

Can SIMPLE IRA be rolled into 401k

A transfer from one SIMPLE IRA retirement fund into another SIMPLE IRA is tax and penalty-free at any given point and time.

Transfers from SIMPLE IRA to personal IRA or to any other type of employer-sponsored plan (including 401K) are allowable only after two years of being in the plan.  IRS deems any rollovers to non-SIMPLE IRAs before the two-year duration as early withdrawals and the transfer accrues income taxes as well as the 25% early withdrawal penalty.

Please Note: Taxes are payable when rolling overs to Roth accounts. This is due to the accounts’ differences in tax treatments.

SIMPLE IRA vs SIMPLE 401 k

Loans

•  You cannot take loans from SIMPLE IRA
• Simple 401k is very  Flexible as it offers optional loans

Filing requirements

• Certain annual employee notifications are usually made for SIMPLE IRA. Plan tax filings with the IRS are not required.
• Simple 401k Requires the annual filing of Form 5500 which can be challenging for small businesses

Minimum age

• There is no minimum age for SIMPLE IRA
• You need to be 21 years and above plus at least a year of service to participate in a 401k

Accounts

• Each employee opens an individual IRA account.
• For 401k there is No individual account contributions are made to a larger investment fund

Contribution Limits

• SIMPLE IRS is capped at $13,000(higher than the $6,000 limit for Traditional IRAs).
• Up to $13,000(although lower than the Traditional 401(k)’s $19,000 limit) for the 401k.

Options to outliers

• SIMPLE IRS Doesn’t give employers any room to offer this option to ineligible employees.
• 401k Employers are allowed to provide any additional plan to employees who do not fall within the qualification guidelines.

Can I withdraw money from SIMPLE IRA| SIMPLE IRA Withdrawal Requirements

Contributions to a SIMPLE IRS vest immediately.

The participant can also make withdrawals and distributions at any time. However;

• Withdrawals are subject to ordinary income tax.
• If under age 59½, the funds will be subject to a 10% federal tax penalty(subject to certain exceptions)
• Access of funds within the first two years from the date of your first contribution attracts a total of 25% in penalties (10% early access plus a further 15% for accessing within two years). State penalties may also apply.
• IRS only allows these withdrawn funds(especially within the first 2 years)to another SIMPLE plan.
• Required minimum distributions (RMDs) start at age 72.

SIMPLE IRA withdrawal exceptions| SIMPLE IRA withdrawal without penalty

You can avoid the early withdrawal penalties if;

• You are 59½ or older, distributions to this group are penalty-free
• Rollover of distributions to a different IRA or employer plan
• Catering for major unreimbursed medical expenses (for medical expenses excess of 7.5% of your income and you are below age 59½.)
• Utilizing funds for qualified higher education expenses like tuition at certain institutions (includes expenses for spouse, children, or grandchildren).
• Withdrawing from your account to purchase a first home(lifetime limit of $10,000.) for yourself and family members(Spouse, Children, Grandchildren, and spouse’s parents)
• Paying Medical insurance under distress e.g. lost your job and you are not in receipt of unemployment compensation for at least 12 consecutive weeks etc.
• IRS will not penalize Military Reservesist who are making a distribution when called to active duty for at least 180 days (or for an indefinite time after September 11, 2001)
• Taking Substantially Equal Periodic Payments
• Permanently Disabled
• For payment of IRS Levies or occur as a result of IRS tax Levy
• Any funds accessed from a deceased person’s IRA
• Incurring expenses related to Birth or adoption

Please note that the taxes are still applicable in all early withdrawals.

SIMPLE IRA withdrawal home purchase

First-time home purchase expenses ($ 10,000-lifetime limit) to buy, build, or rebuild a first home for you or your parents, children, or grandchildren (Note: You must not have owned a home within the past two years.)

SIMPLE IRA RMD

IRS has set a minimum yearly draw-down amount that each participant must access once they reach the age of 72 (70 ½ if you reach 70 ½ before January 1, 2020). These drawdowns attract taxes.

This should not be later than April 1 of the year after turning 70½.

SIMPLE IRA deduction

Is SIMPLE IRA tax deductible

For employers:

• Contributions to the plan are deductible as a business expense.

• Employers must provide certain employee notifications yearly. Also, there is no requirement for IRS filing, tax reporting, and compliance testing.

For participants:

• Investments enjoy Tax-deferred growth
• It allows employees to put in pretax dollars.
• 100% vesting and immediate

Bottom Line

For Participants:

Savings to the plan do not reduce your Social Security benefits as Elective deferral savings attract Social Security and Medicare taxes (FICA).

Employer match is only available if you sign up and contribute.

IRA allows contributors to access other types of retirement savings accounts to complement the plan.

For employers:

Companies cannot exceed 100 employees for two more years after the first year the excess occurred. After two years, the business won’t be eligible to maintain a SIMPLE plan.