What is a SIMPLE Plan?

A Savings Incentive Match Plan for Employees (SIMPLE plan) is a written arrangement that provides you, as the employer, and your employees, with a simplified way to make contributions to provide for retirement income.

A SIMPLE plan allows a small employer to avoid the complexities of nondiscrimination rules associated with qualified plans. A SIMPLE plan can be set up as a SIMPLE IRA plan, using IRAs or as part of a 401(k) plan (SIMPLE 401(k) plan)

Plan assets grow tax free until distributed.

Who Can Participate in a SIMPLE Plan?

Only eligible employees may participate in a SIMPLE plan.

An eligible employee is an employee who:

  • Received at least $5,000 in compensation during any two years preceding the current calendar year and
  • Is reasonably expected to receive at least $5,000 during the current calendar year.

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

Setting Up a SIMPLE Plan

Only employers who had 100 or fewer employees who received $5,000 or more in compensation from the employer for the preceding year may set up a SIMPLE plan.

Employees include self-employed persons who received earned income and leased employees.

A SIMPLE plan can be set up in either of the following ways:

  • Using SIMPLE IRAs (SIMPLE IRA plan)
  • As part of a 401(k) plan (SIMPLE 401(k) plan)

SIMPLE plans can only be maintained on a calendar-year basis.

SIMPE IRAs

Form 5304-SIMPLE or Form 5305-SIMPLE can be used to set up a SIMPLE IRA plan.

When to use Form 5304-SIMPLE:

Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his contributions.

When to use Form 5305-SIMPLE:

Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE-IRA plan be deposited initially at a designated financial institution (e.g., banks, insurance companies).

Eligible Employees

Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee.

An eligible employee is one who:

  • Received at least $5,000 in compensation during any 2 years preceding the current calendar year and
  • Is reasonably expected to receive at least $5,000 during the current calendar year.

Employees may choose to contribute part of their pay to their own SIMPLE IRA account (salary reduction contributions).

Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan unless you qualify for the grace period.

Grace period:

There is a grace period if you maintain the SIMPLE IRA plan for at least one year and don't meet the 100-employee limit it in a later year.

Under the grace period you will be treated as meeting the 100-employee limit for the two calendar years immediately after the calendar year for which you last met it.

When to Set Up a SIMPLE Plan

You can set up a SIMPLE plan any time between January 1st and October 1st of the calendar year.

New Employers:

If you are a new employer whose business began after October 1st, you can set up a SIMPLE plan as soon as administratively feasible.

File your personal and small business taxes (Schedule C)