SIMPLE IRA Definition and Rules
SIMPLE IRA (also sometimes written as Simple IRA) stands for Savings Incentive Match Plan for Employees Individual Retirement Account. A SIMPLE IRA is similar to a traditional IRA, but it has higher contribution limits.
Here’s how it works: A small business owner with fewer than 100 employees, along with the sole proprietor or partner in a business, can set up a SIMPLE IRA for herself and her employees. Per IRS rules, all employees who, in the previous two calendar years, received at least $5,000 in compensation from the employer and who are expected to receive at least as much during the present calendar year are eligible.
Eligible employees can decide to make “elective deferrals,” just like with a 401(k). That means that employees can choose to save a certain percentage of their pre-tax income. The employer then contributes to the SIMPLE IRA on behalf of each eligible employee.
Employer contributions can be either matching (up to 3% of the employee’s contributions) or non-elective. Non-elective means that the employer makes a unilateral decision to contribute to an employee’s savings plan, regardless of whether the employee contributes in a given year. Non-elective matches have a lower limit of 2%.
IRS rules prohibit employees from opting out of a SIMPLE IRA. They can choose not to make elective deferrals (in which case they wouldn’t receive an employer match), but they cannot opt out of receiving non-elective contributions from their employers. This shouldn’t ever be an issue however, because it would be against the employee’s interest to turn down more money from their employer.
Employers can deduct as business expenses all contributions made to employees’ SIMPLE IRAs. For employees, the money contributed to a SIMPLE IRA is pre-tax. This means it can lower your tax liability now.
SIMPLE IRA Contribution Limits
In 2019, SIMPLE IRA contributions can reach $13,000, with a catch-up contribution limit of $3,000. This is lower than 401(k) contribution limits but higher than IRA contribution limits. Plus, the owner of a business can give herself an employer match of up to 3% of net self-employment income. If two spouses work together, they can both make maximum contributions (and deduct them at tax time), making the SIMPLE IRA a great option for married people who work together and file jointly.