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# Keeping it SIMPLE works just fine
- URL: https://www.smdp.com/keeping-it-simple-works-just-fine/
- Published: 2006-04-27T15:00:00.000Z
- Updated: 2026-10-23T17:40:12.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By KIRK G. AGUER*

The Savings Incentive Match Plan for Employees of Small Businesses (SIM- PLE) is a retirement plan designed to help employees working for small businesses save for retirement on a tax-favored basis, while allowing employers current-year tax deductions. A SIMPLE Plan may use a SIMPLE individual retirement account (a SIMPLE IRA) to receive plan contributions. Here are some questions and answers about the SIMPLE IRA retirement plan.

QUESTION: What is a SIMPLE IRA Retirement Plan and what are its advantages?

ANSWER: A SIMPLE IRA plan is a type of “salary reduction” retirement plan for small businesses. Due to its basic design features, it is not subject to the complex eligibility and nondiscrimination requirements associated with traditional 401(k) plans or Salary Reduction- Simplified Employee Pension Plans (SARSEPs). Administrative and other plan costs, therefore, are minimized.

Another advantage of SIMPLE IRA plans, from an employer’s standpoint, is that SIMPLE IRA plans are not subject to annual reporting and testing requirements. Also, the employer will not be subject to fiduciary liability resulting from an employee exercising control over the assets in the employee’s SIMPLE IRA account.

QUESTION: Who can adopt a SIMPLE Plan?

ANSWER: Any employer who has 100 or fewer employees and who does not maintain another plan may adopt a SIM- PLE IRA plan. Employees with compensation of $5,000 or more in up to any two preceding years must be included in the SIMPLE IRA plan. The employer may be a corporation, partnership, sole proprietorship, tax-exempt organization, or a state or local government or agency.

QUESTION: How does a SIMPLE plan work?

ANSWER: A SIMPLE IRA plan allows employees to make pre-tax elective contributions to a SIMPLE IRA. Employee contributions may be any percentage (not over 100 percent) of total compensation (or net earned income) so long as the dollar amount contributed for any year does not exceed $9,000 for 2004 and $10,000 for 2005, plus any allowable catch-up contributions. That’s subject to cost-of-living adjustments for later years. Under a sunset provision in the 2001 tax act, the enhanced limits will expire in 2011 unless Congress extends the act. Eligible employees who are at least age 50 by the last day of the year may defer an additional $1,500 for 2004, $2,000 for 2005 and $2,500 for 2006 and later years. Catch-up contributions are also subject to the sunset provision in the tax law discussed in the note above.

Also, employers must contribute to the employees’ SIMPLE IRA accounts using one of two contribution formulas: 1\. Under the matching contribution formula, employers are required to match employee contributions dollar-for-dollar up to 3 percent of each participating employee’s compensation. A special rule allows employers to elect a lower percentage matching contribution rate but not less than 1 percent of each employee’s compensation. Employers may not elect to use a percentage lower than 3 percent for more than two out of any five consecutive years. 2\. Instead of making matching contributions, for any year, employers may select a non-elective contribution formula of 2 percent of compensation on behalf of each eligible employee regardless of whether the employee is making contributions. The employer may require that each such employee actually receive at least $5,000 in compensation during the year to be eligible to receive this employer contribution. For this purpose, compensation taken into account may not exceed $205,000, as indexed for inflation.

The employer must give written notice specifying the employer’s contribution formula for a particular year to every eligible employee at least 60 days before the start of the year.

SIMPLE IRA contributions may only be made to a SIMPLE IRA account. Except for rollovers from other SIMPLE IRAs, no other contributions may be made.

QUESTION: Who is eligible to participate?

ANSWER: Generally, any employee who received at least $5,000 in compensation during any two prior years, and who is reasonably expected to receive at least $5,000 in compensation during the current year, is eligible to participate in a SIMPLE plan. An employer may elect more liberal eligibility rules. All SIMPLE contributions (employee and employer matching) are fully vested when made.

QUESTION: Can a SIMPLE IRA account be rolled over to an IRA?

ANSWER: If two years have passed since the employee first participated in the SIM- PLE IRA plan, a SIMPLE IRA may be rolled over to a Traditional IRA on a tax-free basis. A SIMPLE IRA account may also be converted to a Roth IRA if the employee’s modified adjusted gross income does not exceed $100,000 and two years have passed since the employee first participated in the SIMPLE IRA plan. However, any future employee and employer contributions under the SIMPLE IRA Plan may only be made to a SIMPLE IRA account.

*Originally published in the Santa Monica Daily Press print edition on April 27, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/042706.pdf?ref=smdp.com)