This is for employees who need information about savings incentive match plans for employees (SIMPLE plans). It explains what a SIMPLE plan is, contributions, and withdrawals.

Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as:

1. Part of a 401(k) plan, or


2. A plan using IRAs (SIMPLE IRAs).

This chapter only discusses the SIMPLE plan rules as they relate to SIMPLE IRAs. If your employer maintains a SIMPLE plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can rollover or transfer your SIMPLE IRA to another financial institution. See Rollovers and Transfers Exception, later.


A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees.

A SIMPLE plan is a written agreement (salary reduction arrangement) between an employer and an employee that allows an eligible employee (including a self-employed individual) to choose to:

1. Reduce his or her compensation by a certain percentage each pay period, and


2. Have the employer contribute the salary reductions to a SIMPLE IRA on behalf of the employee. These contributions are called salary reduction contributions.

All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in the discussion of Traditional IRA accounts. Contributions are made on behalf of eligible employees. (See Eligible Employees, later.) Contributions are also subject to various limits. (See How Much Can Be Contributed to a SIMPLE IRA on My Behalf?, later.)

In addition to salary reduction contributions, an employer must make either matching contributions or nonelective contributions. See How Are Contributions Made?, later.


Employees must be allowed to participate in the employer's SIMPLE plan if they:

1. Received at least $5,000 in compensation from the employer during any 2 years prior to the current year, and
2. Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made.

Contributions under a salary reduction agreement are called salary reduction contributions. They are made on your behalf by the employer. Employers must also make either matching contributions or non-elective contributions.

Salary reduction contributions. During the 60-day period before the beginning of any year, and during the 60-day period before the employee is eligible, an eligible employee can choose salary reduction contributions expressed either as a percentage of compensation, or as a specific dollar amount (if the employer offers this choice). An employee can choose to cancel the election at any time during the year.

An employer cannot place restrictions on the contributions amount (such as by limiting the contributions percentage), except to comply with the salary reduction contributions limit, discussed later.

Matching contributions. Employers, unless they choose to make non-elective contributions, must make contributions equal to the salary reduction contributions chosen (elected) by the employee, but only up to certain limits. See How Much Can Be Contributed to a SIMPLE IRA on My Behalf?, later. These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees (defined earlier) who chose salary reductions. These contributions are referred to as matching contributions.

Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions.

Nonelective contributions. Instead of making matching contributions, employers, if they satisfy certain requirements, can choose to make nonelective contributions on behalf of all eligible employees. These non-elective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from the employer, whether or not the employee chose salary reductions.

One of the requirements the employer must satisfy is notifying the employees that the election was made.


The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made.

Salary reduction contributions. For 1998, salary reduction contributions (employee-chosen contributions) that an employer can make on behalf of an employee under a SIMPLE plan are limited to $6,000.

Self-employed individual. For plan purposes, the term employee includes a self-employed individual who received earned income.

Excludable employees. An employer can exclude from eligibility the following:

1. Employees whose retirement benefits are covered by a collective bargaining agreement (union contract).


2. Employees who are nonresident aliens and received no earned income from sources within the United States.


3. Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year.

Compensation -- employee. For purposes of the SIMPLE plan rules, an employee's compensation for a year generally includes the following:

1. Wages, tips, and other pay from the employer that is subject to income tax withholding, and


2. Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457(b)) plans, SEP plans, and SIMPLE plans.

Compensation -- self-employed individual. For purposes of the SIMPLE plan rules, a self-employed individual's compensation for a year is his or her net earnings from self-employment (line 4, Section A of Schedule SE (Form 1040)) before subtracting any contributions made to a SIMPLE IRA on his or her behalf.

If an employee is a participant in any other employer plans during the year and has elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the $9,500 annual limit on exclusions of salary reductions and other elective deferrals.

If the other plan is a deferred compensation plan of a state or local government or a tax-exempt organization, the limit on elective deferrals is $8,000.

The employee, not the employer, is responsible for monitoring compliance with these limits.

Matching employer contributions. Generally, an employer must make matching contributions to the SIMPLE IRA of each eligible employee in an amount equal to the employee's salary reduction contributions. These matching contributions cannot be more than 3% of the employee's compensation for the calendar year. See Matching contributions less than 3%, later.

Example 1. In 1998, Paul was a participant in his employer's SIMPLE plan. His compensation, before SIMPLE plan contributions, was $41,600, or $800 per week. Instead of taking it all in cash, Paul elected to have 12.5% of his weekly pay ($100) contributed to his SIMPLE IRA. For the full year, Paul's salary reduction contributions were $5,200, which is less than the $6,000 limit on these contributions.

Under the plan, Paul's employer was required to make matching contributions to Paul's SIMPLE IRA. Because the employer's matching contributions must equal Paul's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600).

Example 2. Assume the same facts as in Example 1, except that Paul's compensation for the year was $240,000 and he chose to have 2.5% of his weekly pay contributed to his SIMPLE IRA. In this example, Paul's salary reduction contributions for the year (2.5% times $240,000) were equal to the 1998 limit for salary reduction contributions--$6,000. Because 3% of Paul's compensation ($7,200) is more than the amount the employer was required to match ($6,000), the employer's matching contributions were limited to $6,000. In this example, total contributions made on Paul's behalf for the year were $12,000, the maximum contributions permitted under a SIMPLE plan for 1998.

Matching contributions less than 3%. An employer can reduce the 3% limit on matching contributions for a calendar year, but only if:

1. The limit is not reduced below 1%,


2. The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and


3. Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which employees can enter into salary reduction agreements.

For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which an employer (or a predecessor employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. If an employer chooses to make non-elective contributions for a year (discussed next), that year also will be treated as a year for which the limit was 3%.

Non-elective employer contributions. If an employer chooses to make non-elective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of the employee's compensation for the entire year. For 1998, only $160,000 of the employee's compensation can be taken into account to figure the contribution limit.

An employer can substitute the 2% non-elective contribution for the matching contribution for a year, only if:

1. Eligible employees are notified that a 2% non-elective contribution will be made instead of a matching contribution, and


2. This notice is provided within a reasonable period during which employees can enter into salary reduction agreements.

Example 3. Assume the same facts as in Example 2, except that Paul's employer chose to make non-elective contributions instead of matching contributions. Because the employer's non-elective contributions are limited to 2% of up to $160,000 of Paul's compensation, the employer's contribution to Paul's SIMPLE IRA was limited to $3,200 for 1998. In this example, total contributions made on Paul's behalf for the year were $9,200 (Paul's salary reductions of $6,000 plus the employer's contribution of $3,200).


Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. These rules are discussed in the section on Traditional IRA accounts.

An employer cannot restrict an employee from making withdrawals from a SIMPLE IRA.


Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. If the distribution is a premature distribution (discussed in Traditional IRA accounts), it may be subject to the additional tax on premature distributions. See Additional Tax on Premature Distributions (Early Withdrawals), later.


Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. See Two-year rule, next.

Two-year rule. To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the two-year period beginning on the date on which the individual first participated in his or her employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. The two-year period begins on the first day on which contributions made by the individual's employer are deposited in the individual's SIMPLE IRA.

After the two-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA.


The additional tax on premature distributions (discussed in Traditional IRA accounts) applies to SIMPLE IRAs. If a distribution is a premature distribution and occurs during the 2-year period following the date on which the individual first participated in his or her employer's SIMPLE plan, the additional tax on premature distributions is increased from 10% to 25%.

Also, if a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the two-year rule, and is otherwise a premature distribution, the additional tax imposed because of the premature distribution is increased from 10% to 25% of the amount distributed.