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SIMPLE - Savings Incentive Match Plan for Employees

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) 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 salary reduction arrangement between an employer and an employee that allows an eligible employee choose to reduce his or her compensation by a certain percentage each pay period. The employer then contributes these salary reductions to a SIMPLE IRA on behalf of the employee. The SIMPLE IRA is generally contributed to via these salary reductions and through an employer match. The funds and earnings in the SIMPLE plan are not taxed until withdrawn.

For SIMPLE Plan purposes, the term employee includes a self-employed individual who received earned income. The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.

Limits for Salary Reduction Contributions in a SIMPLE IRA that an employer can make on an employee’s behalf are limited to $10,000 for 2006.

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

If the employer chooses, it may make non-elective contributions instead of matching contributions to each eligible employee’s SIMPLE IRA. These contributions must be 2% of the employee’s compensation for the entire year. As of 2006, only $220,000 of the compensation can be taken into account to figure the contribution limit.

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

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