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Employers with 100 or fewer employees who received at least $5,000 in compensation during the preceding year may adopt a simplified retirement plan, the Savings Incentive Match Plan for Employees (SIMPLE plan). If you want to establish a SIMPLE, it must be the only retirement plan you have if you've already established another plan, you'd have to terminate it or convert it to a SIMPLE.
The plan allows employees to make elective contributions of up to $12,000 per year in 2013, and requires employers to make matching contributions, up to 3 percent of each employee's pay. Alternately, you can decide to make a blanket contribution of 2 percent of each participating employee's pay regardless of whether they make any elective contributions. These are the only contributions permitted.
Assets in the account are not taxed until they are distributed to an employee, and employers may generally deduct contributions to employees' accounts. In addition, the SIMPLE plan is not subject to the nondiscrimination rules or other complex requirements applicable to qualified plans.
SIMPLE plans may be structured as an IRA or as a 401(k) plan. Contributions to a SIMPLE account are limited to the employee's elective contributions, up to $12,000 per year in 2013 (compared to 2013 limits of $5,500 for an IRA and $17,500 for a 401(k)), plus the required matching (nonelective) contributions by the employer, also up to $12,000 per year.
All contributions to an employee's SIMPLE account must be nonforfeitable. That means that the employees vest immediately in contributions made by the employer. If a SIMPLE plan is adopted, it must be open to every employee who is reasonably expected to receive at least $5,000 in compensation during the current year and received at least $5,000 in compensation from the employer during any two preceding years. Self-employed individuals are also eligible to establish a SIMPLE plan.
Distributions from a SIMPLE account are generally taxed like distributions from an IRA. Participants may roll over distributions from one SIMPLE account to another free of tax. In addition, a participant may roll over a distribution from a SIMPLE account to an IRA without penalty if the individual has participated in the SIMPLE plan for two years. However, distributions may not be rolled over tax-free to another type of qualified plan.
Participants who take early withdrawals from a SIMPLE account before age 59.5 are generally subject to the 10 percent early withdrawal penalty. However, employees who withdraw contributions during the two-year period beginning on the date that they first began participating in the SIMPLE plan will be assessed a 25 percent penalty tax.
For more information, see our discussion of SIMPLE plans in the context of employee benefits.