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SIMPLE IRAs: Contributions
Eligible employees may make elective-deferral contributions to their SIMPLE IRAs and the employer may elect to make either matching or nonelective contributions. Employer contributions are mandatory for each year that the SIMPLE IRA plan is maintained.
Employee deferral contributions must be deposited to each employee's SIMPLE IRA by the 30th day following the month for which the deferral applies. For instance, employee deferral contributions for April 2008 must be deposited to the employee's SIMPLE IRAs by May 30, 2008.
Employers have until their tax-filing deadline (including extensions) to deposit matching or non-elective contributions to the employees' SIMPLE IRAs.
Employee Contribution Limit
To their SIMPLE IRAs, eligible employees may defer 100% of compensation up to the annual dollar limit. Employees who are at least age 50 by the end of the applicable year may defer additional amounts. These additional amounts are referred to as "catch-up" contributions.
The limits are as follows:
Simple IRA Employee Deferral Limits |
Tax Year |
Dollar Limit |
Tax Year |
Catch-Up Contribution Limit |
2003 |
$8000 |
2003 |
$1000 |
2004 |
$9,000 |
2004 |
$1,500 |
2005 |
$10,000 |
2005 |
$2,000 |
2006 |
$10,000 |
2006 |
$2,500 |
2007 |
$10,500 |
2007 |
$2,500 |
| 2008 and after |
$10,500 plus cost-of-living adjustments (COLA) increases |
2008 and after |
$2,500 plus COLA increases
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Employer Contribution Limits
An employer is required to make one of two kinds of contributions:
- dollar-for-dollar matching contributions (not to exceed 3% of the employee's compensation) on behalf of eligible employees who make elective-deferral contributions.
- a 2% nonelective contribution to all eligible employees, whether or not they make deferral contributions.
An employer who elects to make matching contributions may reduce the 3% matching contribution to a minimum of 1% for two out of five years, or the employer may replace the 3% matching contribution with a 2% nonelective contribution. For any year the employer replaces the matching contribution with a 2% nonelective contribution, the employer's contribution is treated as if it were a 3% matching contribution - for purposes of the five-year period. For instance, an employer who chooses to make matching contributions but makes a 2% nonelective contribution for one year is, for that year, treated as if he or she made a 3% matching contribution. This means that the employer still has two years of the five within which he or she may make a matching contribution that is less than 3%.
Example 1
ABC Inc. maintains a SIMPLE IRA Plan for 2004, 2005, 2006, 2007 and 2008. ABC elects to make matching contributions to the SIMPLE IRA plan, and contributions to the plan occur as follows:
2004 - 3% matching contribution
2005 - 1% matching contribution
2006 - 3% matching contribution
2007 - 2% matching contribution
2008 - 2% nonelective contribution
ABC meets regulatory requirements because of the following:
- The matching contribution was reduced to a percentage less than 3% for only two of the five years.
- For the year that ABC made a 2% nonelective contribution, the company's contribution is treated as though it is a 3% matching contribution. This gives the employer an exception to the rule by which the matching contribution, for three years of the five-year period, must not be less than 3%. The employer receives the beneficial treatment because a nonelective contribution is made not only to employees who make deferral contributions, but also to eligible employees who make deferral contributions, which could result in the employer contributing more than it would had it elected to make a matching contribution.
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The 2% nonelective contribution is subject to the compensation cap of $230,000. This means that the employer may not consider compensation in excess of $230,000 when determining the amount of nonelective contributions. The salary cap, however, does not apply to matching contributions.
The following examples illustrate how the contribution limits apply.
Example 2
XYZ Corporation maintains a SIMPLE IRA plan, and for the 2008 plan year, XYZ elected to make a matching contribution of 3% on behalf of each eligible employee. The following table shows each employee's wage, the amounts each employee deferred for the 2008 plan year, and the employer's matching contributions.
Employee
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W-2 Wages
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Amount Deferred
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Employer Matching Contribution
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Total Contribution
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Comments
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Mary
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$10,000
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$2,000
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$300
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$2,300
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- XYZ makes a dollar-for-dollar contribution, up to 3% of compensation.
- $10,000 x 3% = $300
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Cindy
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$10,000
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$200
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$200
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$400
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- XYZ makes a dollar-for-dollar contribution.
- Although $10,000 x 3% = $300, XYZ's contribution cannot exceed the amount deferred by Cindy.
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Jane
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$50,000
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$0
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$0
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$0
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- Since Jane did not defer, XYZ cannot make a matching contribution for her.
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Tom
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$200,000
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$8,000
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$6,000
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$14,000
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- XYZ makes a dollar-for-dollar contribution, up to 3% of compensation.
- $200,000 x 3% = $6,000.
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Dick
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$250,000
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$7,000
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$7,000
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$14,000
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- XYZ makes a dollar-for-dollar contribution, up to 3% of compensation.
- $250,000 x 3% = $7,500. However, XYZ's contribution cannot exceed the amount deferred by Dick ($7,000).
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Harry
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$300,000
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$8,000
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$8,000
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$16,000
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- XYZ makes a dollar-for-dollar contribution, up to 3% of compensation.
- $300,000 x 3% = $9,000. However, XYZ's contribution cannot exceed the amount deferred by Harry $8,000.
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Example 3
The facts are the same as those in Example 1 except that XYZ chose to make a 2% nonelective contribution. The contribution amounts are as follows:
Employer Making 2% Nonelective Contributions
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Employee
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W-2 Wages
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Amount Deferred
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Employer Nonelective Contribution
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Total Contribution
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Comments
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Mary
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$10,000
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$2,000
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$200
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$2,200
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- XYZ must contribute 2% of compensation, regardless of how much Mary deferred.
- $10,000 x 2% = $200.
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Cindy
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$10,000
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$200
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$200
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$400
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- XYZ must contribute 2% of compensation, regardless of how much Cindy deferred.
- $10,000 x 2% = $200.
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Jane
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$50,000
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$0
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$1,000
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$1,000
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- XYZ must contribute 2% of compensation, regardless of how much Jane deferred.
- $50,000 x 2% = $1,000.
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Tom
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$200,000
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$8,000
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$4,000
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$12,000
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- XYZ must contribute 2% of compensation, regardless of how much Tom deferred.
- $200,000 x 2% = $4,000.
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Dick
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$250,000
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$7,000
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$4,600
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$11,600
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- XYZ must contribute 2% of compensation, regardless of how much Dick deferred. However XYZ may not consider compensation in excess of $230,000 (the salary cap) when making a nonelective contribution.
- $230,000 x 2% = $4,600.
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Harry
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$300,000
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$8,000
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$4,600
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$12,600
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- XYZ must contribute 2% of compensation, regardless of how much Harry deferred. However XYZ may not consider compensation in excess of $230,000 (the salary cap) when making a nonelective contribution.
- $230,000 x 2% = $4,600.
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Investment Options for Contributions
The investment options for a SIMPLE IRA are many and varied, and there are relatively few investments that are not permitted for a SIMPLE IRA. The investment choices of the SIMPLE IRA owner depend on the SIMPLE IRA product and the financial institution. Some choices may be limited to a pre-selected core group of investments or a specific investment. With SIMPLE IRAs that are commonly referred to as self-directed SIMPLE IRAs, the owner is free to choose the investments.
Permissible investments for IRAs include stocks, bonds, mutual funds, real estate, some coins and money market funds.
Investment in Collectibles
IRAs cannot invest in collectibles, which include art works, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and certain other tangible personal property. The exceptions are U.S. gold coins, silver coins minted by the Treasury Department, certain platinum, gold, silver, palladium and platinum bullion. Volume limitations apply.
Some financial institutions place further restrictions on SIMPLE IRA investments.
Next: SIMPLE IRAs: Distributions
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