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 2018 must be deposited to the employee's SIMPLE IRAs by May 30, 2018.

Employers have until their tax-filing deadline (including extensions) to deposit matching or nonelective contributions to the employees' SIMPLE IRAs.

Employee Contribution Limit 

Eligible employees may defer 100% of compensation up to the annual dollar limit to their SIMPLE IRAs. 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 dollar limit is 100% of compensation, up to $12,500 ($13,000 for 2019). Participants who are at least age 50 by the end of the year may make an additional catch-up contribution of $3,000.

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, regardless of whether they make deferral contributions

One important difference between a SIMPLE IRA and a 401(k): Employer contributions to the employee's account vest immediately. For 401(k)s, employees generally have to work for the employer for a specified period of time before becoming fully vested and receiving the employer's contributions to their account. 

An employer who elects to make matching contributions to a SIMPLE IRA 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 the 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 made a 3% matching contribution. This means that the employer still has two years of the five to make a matching contribution that is less than 3%.

 

Example: SIMPLE IRA Matching Contribution Rules

ABC Inc. maintains a SIMPLE IRA Plan for 2014, 2015, 2016, 2017 and 2018. ABC elects to make matching contributions to the SIMPLE IRA plan, and contributions to the plan occur as follows:
2014 – 3% matching contribution
2015 – 1% matching contribution
2016 – 3% matching contribution
2017 – 2% matching contribution
2018 – 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 made deferral contributions, but also to eligible employees who did not make deferral contributions, which could result in the employer contributing more than it would have if it had elected to make a matching contribution.

The 2% nonelective contribution is subject to a compensation cap of $280,000 ($275,000 in 2018). This means that the employer may not consider compensation in excess of that amount 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: SIMPLE IRA Employer Matching Contribution Limits
XYZ Corporation maintains a SIMPLE IRA plan, and for the 2018 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 2018 plan year, and the employer's matching contributions.
Employee W-2 Wages Amount Deferred Employer Matching Contribution Total Contribution Comments
Mary

 

$10,000

 

$2,000

 

$300

 

$2,300

 

XYZ makes a dollar-for-dollar contribution, up to 3% of compensation.
$10,000 x 3% = $300
Cindy

 

$10,000

 

$200

 

$200

 

$400

 

XYZ makes a dollar-for-dollar contribution.
Although $10,000 x 3% = $300, XYZ's contribution cannot exceed the amount deferred by Cindy.
Jane

 

$50,000

 

$0

 

$0

 

$0

 

Since Jane did not defer, XYZ cannot make a matching contribution for her.
Tom

 

$200,000

 

$8,000

 

$6,000

 

$14,000

 

XYZ makes a dollar-for-dollar contribution, up to 3% of compensation.
$200,000 x 3% = $6,000.
Dick

 

$250,000

 

$7,000

 

$7,000

 

$14,000

 

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).
Harry

 

$300,000

 

$8,000

 

$8,000

 

$16,000

 

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).

 

 

 

Example: Employer Making 2% Nonelective Contributions

The facts are the same as those in the example above except that XYZ chose to make a 2% nonelective contribution. The contribution amounts are as follows:

Employee W-2 Wages Amount Deferred Employer Nonelective Contribution Total Contribution Comments
Mary

 

$10,000

 

$2,000

 

$200

 

$2,200

 

XYZ must contribute 2% of compensation regardless of how much Mary deferred.
$10,000 x 2% = $200.
Cindy

 

$10,000

 

$200

 

$200

 

$400

 

XYZ must contribute 2% of compensation, regardless of how much Cindy deferred.
$10,000 x 2% = $200.
Jane

 

$50,000

 

$0

 

$1,000

 

$1,000

 

XYZ must contribute 2% of compensation, regardless of how much Jane deferred.
$50,000 x 2% = $1,000.
Tom

 

$200,000

 

$8,000

 

$4,000

 

$12,000

 

XYZ must contribute 2% of compensation regardless of how much Tom deferred.
$200,000 x 2% = $4,000.
Dick

 

$280,000

 

$7,000

 

$5,500

 

$12,500

 

XYZ must contribute 2% of compensation regardless of how much Dick deferred. However XYZ may not consider compensation in excess of $275,000 (the salary cap) when making a nonelective contribution.
$275,000 x 2% = $5,500.
Harry

 

$300,000

 

$8,000

 

$5,500

 

$13,500

 

XYZ must contribute 2% of compensation regardless of how much Harry deferred. However XYZ may not consider compensation in excess of $275,000 (the salary cap) when making a nonelective contribution.
$275,000 x 2% = $5,500

 

 

Investment Options for Contributions

The investment options for a SIMPLE IRA are varied; relatively few investments 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 preselected 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 SIMPLE IRAs include stocks, bonds, mutual funds, real estate, some coins and money market funds.

Investment in Collectibles

SIMPLE 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, and certain platinum, gold, silver, palladium and platinum bullion. Volume limitations apply.

Some financial institutions place additional restrictions on SIMPLE IRA investments.

SIMPLE IRAs: Distributions