AVAILABLE TO
Employees who are employed by a company that does not maintain another retirement plan and has 100 or fewer employees earning at least $5,000 for the preceding year. Employee contributions are made through salary reduction and are tax-deferred.
HOW IT WORKS
Employer must contribute to the SIMPLE IRAs of eligible employees under one of two IRS-prescribed formulas. Eligible employees may contribute a stated percentage of compensation per year (up to IRS limits) pursuant to a salary deferral agreement with the employer.
MAIN FEATURES
To be eligible, employees cannot be required to meet more than the following two requirements: (1) earned at least $5,000 in compensation during any two prior years and (2) reasonably expect to earn at least $5,000 in year of participation. There is no minimum age requirement for eligibility. Employee and employer contributions are both immediately 100% vested. An early distribution penalty of 10% applies on withdrawals before age 59½ (with certain exceptions); that penalty is increased to 25% if the distribution is taken within two years of the date contributions were first deposited into the SIMPLE IRA plan maintained by the individual's employer. Required minimum distributions generally begin at age 70½. Employer contributions can be made until employer's tax filing deadline (including extensions).
ANNUAL CONTRIBUTIONS
Eligible employees may defer up to $10,000 of their salary in 2005 and 2006. Eligible employees who will turn 50 or older may defer an additional $2,000 in catch-up contributions in 2005.1 Employer contributes to the SIMPLE IRAs of eligible employees based upon one of two formulas:
Matching option - requires employer to match each participant's contributions dollar-for-dollar - up to 3% of compensation but no more than $10,000 for the 2005 and 2006 plan years. Also allows the employer to reduce the employer's match to as little as 1% of each participant's compensation for any two years in a five-year period.
Nonelective contribution option - requires employer to contribute 2% of each eligible employee's compensation each year - up to a maximum of $5,100 for the 2005 plan year regardless of whether the participant contributes or not (the maximum annual compensation on which contributions can be based is $210,000 for 2005).
ADVANTAGES
The above review is meant to serve as a general overview only; other requirements apply. You should consult a tax advisor for applicability to specific facts and circumstances. You should always review any materials provided by your employer to learn more specific information about plan(s) in which you are eligible to participate.
1. Catch-up contributions are available to eligible employees if the plan allows. Eligible employees must have turned 50 years old before the end of the year for which the contribution is made.