SIMPLE IRAs Are Not Always So Simple…

So what is a SIMPLE IRA anyway? A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a type of retirement plan that allows employees and employers to contribute to traditional IRAs set up for employees. It is typically used by small employers who don’t currently have a retirement plan in place.
A few things to keep in mind:

  • Employers may be set up a SIMPLE IRA plan any time between January 1st and October 1st.
  • SIMPLE IRAs are maintained on a calendar-year basis.
  • The plan must be maintained for at least the entire calendar year – you can’t start one then decide to terminate it in the middle of the year.
  • There is a 100 employee limitation.
  • A SIMPLE IRA must be set up for each eligible employee (there is no “opt out” option).
  • Contributions may only be made through salary reductions (employee) or through matching or elective contributions (employer).
  • For 2016, an employee’s salary contributions cannot exceed $12,500 (there are additional rules if the employee has more than 1 employer plan).
  • Employer contribution rules and limits depend on whether the employer makes matching or non-elective contributions.
  • During the first two years after an employee’s SIMPLE IRA is established, early withdrawals may be subject to a 25% early distribution penalty (not a 10% penalty like a traditional IRA) unless an exception applies.
  • Also during the first two years, you may only rollover or transfer the SIMPLE IRA assets to another SIMPLE IRA or you will be deemed as having withdrawn the money, subject to income tax and a 25% early distribution penalty unless an exception applies.
  • If an employer decides to terminate their SIMPLE IRA plan, employees must be notified within a reasonable time before November 2nd.
  • If a SIMPLE IRA plan is terminated by November 2nd, all contributions for the current year must still be made. For example, if a SIMPLE IRA termination notice was sent to employees on June 1, 2016, contributions promised for 2016 must still be made.

Source:; IRS Publication 560

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