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Federal Guidelines for Simple IRA Deductions

May 12, 2010 | By John Csiszar

A SIMPLE IRA, formally known as a Savings Incentive Match Plan for Employees Individual Retirement Account, is a long-term investment account that allows employers and employees to contribute to their retirement savings. A SIMPLE IRA is a simplified employer-sponsored plan that has lower administrative costs than more complex retirement plans such as profit-sharing or money purchase pension plans. Internal Revenue Service Publication 560 specifies the regulations and requirements to establish and maintain a SIMPLE IRA plan. Employer contributions to the plan may be deductible, but only if all IRS rules regarding SIMPLE plans are followed.

Eligibility and Requirements

You can only establish a SIMPLE IRA plan if you are an employer with 100 or fewer employees earning $5,000 or more in compensation the previous year. For purposes of the 100-person limit, all employees from the previous calendar year must be counted, even those who would not qualify for inclusion in the SIMPLE plan. SIMPLE plans must be set up using a prototype SIMPLE plan available at many financial institutions or an IRS model SIMPLE plan. Each eligible employee must be notified about the plan provisions as well as provided with their own individual SIMPLE IRA account. An eligible employee is defined as any person who earned $5,000 in any two previous years and who can be reasonably expected to earn $5,000 in the current year, according to the IRS.

Employer Contributions

As an employer, you must make contributions to the SIMPLE IRA accounts of your eligible employees. You can make contributions based on one of two formulas. Your first option is to make a dollar-for-dollar match of any employee's contribution, up to 3 percent of their compensation. Your second option is to make a non-elective contribution to all employees' accounts in the amount of 2 percent of their compensation, regardless of whether or not they made a contribution themselves.

Deductibility

Assuming you abide by all IRS regulations regarding the establishment and maintenance of your SIMPLE IRA plan, you as an employer are allowed to deduct all contributions made on behalf of employees. This applies to both matching contributions as well as non-elective contributions.

Contribution Limits

The IRS reviews SIMPLE IRA plan contribution limits annually. For 2010, the maximum amount an employee may contribute to a SIMPLE plan is $11,500. If the employee is age 50 or older, the IRS allows a "catch-up" contribution of an additional $2,500, bringing the total contribution limit to $14,000 for employees 50 and older.

Reporting Requirements

Unlike with other employer-sponsored retirement plans, there are no financial reports that must be filed with the government regarding SIMPLE IRA plans. As long as you provide participants and eligible employees with a summary description outlining the basic functioning and purpose of the plan, you have satisfied IRS plan requirements.

References

Article reviewed by I.P. Last updated on: May 12, 2010

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