SIMPLEs — Savings Incentive Match Plans for Employees
Savings incentive match plans for employees, or SIMPLEs, are a type of retirement plan that allows businesses to share the cost of funding retirement savings. The company sets up the plan and employees are given the option of contributing within set limits a portion of their salaries to the plan. The company must make certain contributions according to a formula fixed by the tax law. The reason this type of retirement plan is SIMPLE lies in the ease of setting it up and administering it.
If you are self-employed or a shareholder in a corporation, the business can set up a SIMPLE plan that allows you (and your employees) to make elective deferrals (salary reduction contributions) to the plan. Such amounts are excluded from your income. As an employer, you must contribute a set amount for each plan participant; you deduct your employer contribution as a business expense.
Whether you are the owner of the business or merely a rank-and-file employee, you can make elective deferral contributions to the plan. Like 401(k) plans discussed earlier, the portion of your compensation that you treat as your elective deferral is not included in your income for the year. (Limits on elective deferrals and required employer contributions are explained next under “Conditions.”)
Earnings on contributions build up on a tax-deferred basis.
A SIMPLE can be set up as either a SIMPLE-IRA or a SIMPLE-401(k) plan. For purposes of the following discussion, only the SIMPLE-IRA, the more popular type, is examined.