SIMPLE Plan Matching and Nonelective (mandatory) Contributions

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Matching and Nonelective (Mandatory) Contributions

You have two options for making SIMPE IRA contributions.

Matching Contributions (which is elective).
Nonelective Contributions (which is mandatory).

Matching contributions:

You make a dollar-for-dollar matching contribution of each employee's contribution up to 3% of the employee's gross pay.
You may choose to contribute less than 3%, but no less than 1%. If you choose a lower percentage than 3%, you must notify the employee of the lower match within a reasonable period of time before the 60-day election period for the calendar year.
The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). The dates of this period are modified if you set up a SIMPLE IRA plan in mid year (i.e. July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.
If the employee makes no contributions out of his/her own pay, that employee does not receive matching employer contributions.

Nonelective contributions:

If you choose this option for making contributions, you must make them even if employees do not make their own contributions.
Your contribution percentage is 2% of each eligible employee's gross pay who has at least $5,000 (or some lower amount that you select) of compensation from you for the year.
For 2012, up to $250,000 of an employee's compensation may be taken into account to figure the contribution limit ($245,000 in 2011)

Federal Income Taxes and FICA Taxes

Employees:

Employee contributions are excluded from their gross wages and therefore, are not subject to federal income taxes.
However, employee contributions are not excluded from social security wages or Medicare wages and therefore, contributions are subject to social security and Medicare taxes.

Employers:

Employer matching or nonelective contributions are not subject to federal income taxes.
Unlike employee contributions, which ARE subject to FICA taxes (social security and Medicare taxes), an employer's contributions are NOT subject to FICA (or RRTA) taxes.
In addition, employer contributions are not subject to federal unemployment taxes (FUTA).
- NOTE: FUTA taxes are strictly an employer tax; employees never pay FUTA taxes. The FUTA tax is based on the first $7,000 of each employee's gross wages only.

Example: Matching Contributions

Jane Smith has an annual salary of $40,000
She contributes 5% of her salary to her SIMPLE IRA
Jane's yearly contribution is $2,000 (5% x $40,000)
Her employer's contribution is $1,200 (3% x $40,000)

Jane's $2,000 contribution is not subject to federal income taxes. But the $2,000 is subject to FICA taxes.

On the other hand, her employer's contributions are not subject to federal income taxes or FICA taxes (not even FUTA taxes).

Example: Nonelective Contributions

John Money has an annual salary of $40,000
He chooses not to make any SIMPLE IRA contributions
The employer must contribute $800 (2% x $40,000) to John's SIMPLE IRA.

The employer's contributions are not subject to federal income taxes or FICA taxes or FUTA taxes.

Self-employed persons:

For retirement plan purposes a self-employed person is considered both:

An "employee" of his/her business and
his/her own "employer"

As a result, you're allowed to make two separate contributions for yourself:

One as "employee"
Another as "employer"

Example:

Contribution for yourself as an "employee":

If your business compensation was $40,000 and your contribution rate was 10%, as an "employee", you could contribute $4,000 (10% x $40,000) to your SIMPLE IRA.

Contribution for yourself as your own "employer":

Now, in your capacity as your own "employer", you can also make a matching (or nonelective) contribution for yourself.

Assume you make a matching contribution of 3%.

With compensation of $40,000 you can make a contribution of $1,200 (3% x $40,000 compensation).

Your total Contribution: $5,200.

Your total contribution is made up of:

Your $4,000 (10% x $40,000) as "employee" plus
Your matching contribution of $1,200 (3% x $40,000) as your own "employer".

Taxes for Self-Employed:

Although matching and nonelective contributions made by an employer are not subject federal income taxes or FICA taxes, contributions made by a self-employed person are subject to self-employment taxes.

Choosing a Lower Matching Percentage

You can choose a lower matching percentage for a limited period of time.

However, the lower percentage may not be less than 1% and you must notify the employees of the lower match within a reasonable period of time before the 60-day election period for the calendar year.

SIMPLE Plans: SIMPLE Plan Nonelective Contributions; How Much Can a Nonelective Contribution Be?

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