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SIMPLE plans.
(Savings
Incentive Match Plan For Employees) A
SIMPLE plan can be set up by an employer who had 100 or fewer employees
who received at least $5,000 in compensation from the employer for the
preceding calendar year and who meets certain other requirements. Under a
SIMPLE plan, employees can choose to make salary reduction contributions
rather than receiving these amounts as part of their regular pay. In
addition, you will contribute matching or nonelective contributions. The
two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k)
plan. Employee
limit. You can set up a SIMPLE IRA plan only
if you had 100 or fewer employees who received $5,000 or more in
compensation from you for the preceding year. Under this rule, you must
take into account all employees employed
at any time during the calendar year regardless of whether they are
eligible to participate. Employees include self-employed individuals who
received earned income and leased employees. Once
you set up a SIMPLE IRA plan, you must continue to meet the 100-employee
limit each year you maintain the plan.
Compensation. Compensation for employees is the total wages required to be
reported on Form W–2. Compensation also includes the salary reduction
contributions made under this plan, compensation deferred under a section
457 plan, and the employees' elective deferrals under a section 401(k)
plan, a SARSEP, or a section 403(b) annuity contract. If you are
self-employed, compensation is your net earnings from self-employment
(line 4 of Short Schedule SE (Form 1040)) before subtracting any
contributions made to the SIMPLE IRA plan for yourself.
Other qualified plan.
The SIMPLE IRA plan generally must be the only retirement plan to which
you make contributions, or to which benefits accrue, for service in any
year beginning with the year the SIMPLE IRA plan becomes effective.
Deadline for setting
up a SIMPLE IRA plan. You can set up a SIMPLE IRA plan effective on any date from
January 1 thru October 1 of a year, provided you did not previously
maintain a SIMPLE IRA plan. This requirement does not apply if you are a
new employer that comes into existence after October 1 of the year the
SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as
administratively feasible after your business comes into existence. If you
previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan
effective only on January 1 of a year. A SIMPLE IRA plan cannot have an
effective date that is before the date you actually adopt the plan.
Contributions are made up of salary reduction
contributions and employer contributions. You, as the employer, must make
either matching contributions or nonelective contributions, defined later.
No other contributions can be made to the SIMPLE IRA plan. These
contributions, which you can deduct, must be made timely.
Salary reduction
contributions. The amount the employee chooses to have you contribute to a
SIMPLE IRA on his or her behalf cannot be more than $10,000 (Actual limit
may differ due to adjustments for inflation). These contributions must be expressed as a percentage
of the employee's compensation unless you permit the employee to express
them as a specific dollar amount. You cannot place restrictions on the
contribution amount (such as limiting the contribution percentage), except
to comply with the limit.
Tax Treatment of
Contributions
You can deduct your contributions and your employees can
exclude these contributions from their gross income. SIMPLE IRA
contributions are not subject to federal income tax withholding. However,
salary reduction contributions are subject to social security, Medicare,
and federal unemployment (FUTA) taxes. Matching and nonelective
contributions are not subject to these taxes.
Distributions
(Withdrawals)
Distributions from a SIMPLE IRA are subject to IRA rules
and generally are includible in income for the year received. Tax-free
rollovers can be made from one SIMPLE IRA into another SIMPLE IRA.
However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax
free only after a 2-year participation in the SIMPLE IRA plan.
Early withdrawals generally are subject to a 10%
additional tax. However, the additional tax is increased to 25% if funds
are withdrawn within 2 years of beginning participation.
You can adopt a SIMPLE plan as part of a 401(k) plan if
you meet the 100-employee limit.
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