About the SIMPLE IRA Plan for Your Business

The SIMPLE IRA: Is This the Best Retirement Plan for Your Business?

Presented by Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:

As an employer with 100 or fewer employees, you have the ability to establish a simple and cost-effective retirement plan for you and your staff. There are a few options available, but one you may want to consider is the Savings Incentive Match Plan for Employees, commonly known as SIMPLE IRA. This plan type is an attractive recruiting and retention tool for highly compensated employees who are deterred from traditional 401(k) plans due to discrimination testing.


A SIMPLE IRA is an employer-sponsored IRA set up for employees. Contributions to the plan can be made by both employees and the employer.

Who can set up a SIMPLE IRA

This type of IRA is suitable for corporations, partnerships, sole proprietors, and tax-exempt or government employers with 100 or fewer eligible employees.

What are the Features?

  • SIMPLE IRAs are low-cost plans that are easy to establish and maintain because there are minimal IRS filing requirements and no annual compliance tests.
  • Unlike some other retirement plans, SIMPLE IRAs are not required to follow certain Internal Revenue Code rules that prohibit discrimination in favor of higher-paid workers.
  • Employers must make the plan available to any employee who received at least $5,000 in compensation during any two preceding years and who is expected to receive at least $5,000 in compensation during the current calendar year.
  • Both employee deferrals and employer-matching contributions are made to the account. Employers have the option of contributing either employee deferral matches or nonelective contributions.

Maximum annual contribution limits and rules

An employee can defer up to $14,000 for 2022 if they are younger than 50. The catch-up contribution for employees age 50 and older is $3,000 in 2022.

Employers are required to contribute to employee plans and can select from one of two options:

  1. Match each employee’s salary deferral on a dollar-for-dollar basis up to 3 percent of the employee’s annual compensation (not limited by the annual compensation limit).
  2. Make nonelective contributions of 2 percent of the employee’s annual compensation up to the annual compensation limit of $305,000 for 2022.

The first option is a mandatory match for only those employees who make salary deferrals into the plan. The second one is mandatory for all eligible employees, regardless of whether they make a contribution to the plan.

Important Considerations

Please keep in mind that no other retirement plan can be offered concurrently with a SIMPLE IRA.

SIMPLE IRAs also have a unique two-year rule that prevents the assets from being distributed or rolled over too soon. For a participant younger than 59½ without a premature penalty exception (see below), the 10 percent premature penalty increases to 25 percent if it’s been less than two years since the first employer contribution was made into the account. If the participant is older than 59½ and within the two-year time frame, no penalty will apply.

Lastly, SIMPLE IRAs can be rolled into other SIMPLE IRAs only within the two-year time frame. Any rollovers into other types of retirement plans, such as traditional IRAs, SEP IRAs, and 401(k)s, can be made only after two years.

Distribution Rules

SIMPLE IRA distribution rules generally are the same as traditional IRA rules, with the exception of the two-year rule. Distributions are taxed at current income tax rates in the year of distribution. If the employee is younger than 59½, the premature distribution penalty of 10 percent may apply (25 percent if within the two-year rule). Exceptions to the premature penalty are as follows:

  • Reaching retirement age of 59½
  • Death of participant
  • Disability of participant
  • Qualified higher-education expenses
  • Qualified first-time home purchase (up to $10,000 per lifetime)
  • Unreimbursed medical expenses (greater than 10 percent of adjusted gross income; 10 percent if younger than 65)
  • Health insurance premiums paid while unemployed
  • Series of substantially equal periodic payments (i.e., SEPP or 72(t) plan)

For employees ages 72 and older, required minimum distributions must be taken annually, even if the employee is still working.[1] 

Getting Started

The required documents vary from institution to institution but usually include an adoption agreement and IRS Form 5305 or 5304. The 5305 means the entire plan and all participant SIMPLE IRAs are established at one institution; the 5304 allows the accounts to be established at different institutions. A SIMPLE IRA must be established between January 1 and October 1 of the calendar year. A 60-day notice must be given to all eligible employees, offering them the right to make a salary deferral contribution for the year or to modify a previous election.

SIMPLE IRAs offer a way to take advantage of the benefits of a qualified retirement plan for your employees without having to deal wit the complicated tests and filings required to maintain one. They are a great incentive for your employees and a great way to save for your own retirement! 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.


Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at info@gwadvisors.net.

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© 2021 Commonwealth Financial Network®

[1] For employees who turned 70½ before January 1, 2020, required minimum distributions must begin at age 70½.

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