A Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) is an employer-sponsored retirement plan, similar to a 401(k), in which employees and employers can contribute into the employee's plan for investment. SIMPLE IRAs are available to employers with up to 100 employees. Employers who offer SIMPLE IRAs are required by the IRS to report certain information on Form W-2 for participating employees.
Here's a brief overview of SIMPLE IRAs, what employers need to include on Form W-2, why, and how.
- Employers who offer SIMPLE IRAs are obligated to include specific information on a plan participant's W-2 form.
- Salary deferral contributions are among the requirements that must be included on each employee's W-2.
- Employees report their annual contributions on Form 1040.
How SIMPLE IRAs Work
SIMPLE IRAs are designed for small businesses as a way to offer a retirement savings plan for employees. Contributions are made via salary deferral by the participant. For 2020, employees may defer up to $13,500, and participants age 50 or older may contribute up to $3,000 in catch-up contributions per year.
Employers have two options. They can:
- Match up to 3% of a participant employee's annual salary and contribute each year to the plan, or
- Make non-elective contributions equal to 2% of each eligible employee's pay—up to $285,000 for 2020—regardless of whether the employee makes elective deferrals.
Simple IRA W-2 Reporting Requirements
As the SIMPLE IRA works similarly to other employer-sponsored retirement plans, such as a 401(k) plan, salary deferral contributions must be reported on each participant employee's W-2.
Most small businesses with 100 or fewer employees can set up a SIMPLE IRA.
On Form W-2 for employee compensation, SIMPLE IRA contributions made by the employee are deducted from the "wages, tips, and other compensation" box, and box 13 "retirement plan" is selected.
The dollar amounts of the total annual contributions are not specifically listed but are calculated and reported by the taxpayer. The salary reduction contributions are subject to Social Security, Medicare, and federal unemployment taxes. Contribution amounts are added back into earnings for these boxes, which are numbers 3 and 5, respectively, on Form W-2.
Employee participants report their contributions for the year on Form 1040, Schedule 1, Line 28.
Meanwhile, the employer receives a deduction for any matching contributions made to the participant on Schedule C of the company's business tax return. Since the contributions are deductible for the employer, the company's matching dollars are not reported on the W-2 form for the employee.