Are SIMPLE IRA Plans Subject to ERISA Rules?

If you have a SIMPLE IRA, then know that it is covered by ERISA

The Employee Retirement Income Security Act (ERISA) covers most employer-sponsored retirement plans including SIMPLE individual retirement accounts ( SIMPLE IRAs). SIMPLE IRAs were designed to make it easy for businesses with fewer than 100 employees to set up a tax-advantaged retirement plan for their workers.

Here's a look at how ERISA rules apply to SIMPLE IRAs.

Key Takeaways

  • SIMPLE IRAs are subject to ERISA rules, which cover most employer-sponsored retirement plans.
  • ERISA dictates how a plan is structured and administered.
  • Requirements for SIMPLE IRAs include spelling out who is eligible to participate and when, and how contributions are handled.

ERISA Requirements for SIMPLE IRAs

SIMPLE stands for Savings Incentive Match Plans for Employees. SIMPLE IRAs don't have the reporting and administrative burden that qualified retirement plans (such as 401(k)s) do, and they are easier to set up.

ERISA, which was enacted in 1974, details requirements for structuring and administrating employer retirement plans. For SIMPLE IRAs, ERISA dictates which employees are eligible and how a company handles employee contributions.

Employers must clearly cite details of the plan's features within a Summary Plan Description. This document contains an explanation of employees' rights and employers' responsibilities.

ERISA allows employers some flexibility to tailor the eligibility requirements, but generally, all employees older than 21 who have put in at least one year of service must be eligible for the plan. Some employers may allow employees to become eligible sooner, sometimes even immediately.

Employee Contribution Rules

ERISA also defines key issues with regard to handling employee contributions. Salary deferral contributions for a SIMPLE IRA, for example, must be deposited in the participant's account by the end of the month following the month in which the funds were withheld from the participant's paycheck.

Self-employed individuals, even those who have no employees, are eligible to set up a SIMPLE IRA.

SIMPLE IRAs are subject to contribution limits. For 2022, employees can contribute as much as $14,000 (rising to $15,500 in 2023). Those age 50 and older can contribute an additional $3,000 in 2022 ($3,500 in 2023), which is known as a catch-up contribution.

The employer can match this amount dollar for dollar, for a maximum of 3% of the employee’s compensation. Or as an alternative, an employer can contribute 2% of each employee's compensation without requiring employee contributions. This is known as a nonelective contribution.

Contribution limits are higher for a SIMPLE IRA than for a traditional or Roth IRA, but lower than the limits for a 401(k). For 2022, the annual contribution limit for traditional and Roth IRAs is $6,000 (increasing to $6,500 for 2023) with a $1,000 catch-up contribution allowed for those 50 and older. For 2022, employees can contribute as much as $20,500 to a 401(k) (rising to $22,500 in 2023), with a catch-up contribution of $6,500 (rising to $7,500 in 2023).

Investment Choices for SIMPLE IRAs

Since these accounts are IRAs, employee participants have full control of the investment choices for their SIMPLE IRA. This differs from 401(k) plans where typically the employer offers a limited number of pre-screened funds from which employees may choose.

With a SIMPLE IRA, the employer chooses and files the plan using IRS forms 5304-SIMPLE or 5305-SIMPLE. The employer can either designate a particular financial institution to hold all participants' accounts or allow participants to keep their SIMPLE IRA at the financial institution of their choice.

Article Sources
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  2. Internal Revenue Service. "SIMPLE IRA Plan."

  3. U.S. Department of Labor. "Types of Retirement Plans."

  4. U.S. Department of Labor. "FAQs About Retirement Plans and ERISA," Page 2.

  5. U.S. Department of Labor. "FAQs About Retirement Plans and ERISA," Pages 2-3.

  6. U.S. Department of Labor. "FAQs About Retirement Plans and ERISA," Page 1.

  7. U.S. Department of Labor. "Plan Information."

  8. U.S. Department of Labor. "FAQs About Retirement Plans and ERISA," Page 3.

  9. Internal Revenue Service. "Retirement Topics - Catch-Up Contributions."

  10. Internal Revenue Service. “401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500.”

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