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SIMPLE Plan for Small Businesses

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plan is a plan in which a small business with 100 or fewer employees can offer retirement benefits through employee salary reductions and matching contributions (similar to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE IRA plans impose few administrative burdens on employers because IRAs are owned by the employees and the bank or financial institution receiving the funds does most of the paperwork.

  • SIMPLE IRA plans are NOT required to file annual financial reports with the government.

While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately 100% vested in both.

  • A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to the traditional plans.
  • Similar to a safe harbor 401(k) plan, however, the employer is required to make employer contributions that are fully vested.
  • This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year.
  • In addition, employees that are covered by a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.

Tax Treatment of SIMPLE IRA Plans

SIMPLE IRA contributions are not subject to federal income tax withholding. However:

  • Salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes.
  • Matching and nonelective contributions are not subject to these taxes.

Employer matching contributions. The employer is generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. This requirement does not apply if the employer makes nonelective contributions instead.

  • Lower percentage. An employer may choose to make a matching contribution less than 3%, but it must be at least 1% and for no more than 2 out of 5 years. See Notice 98-4 for more information. The employer must notify the employees of the lower match within a reasonable period before the 60-day election period for the calendar year.

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