SIMPLE IRA - Rules

Rules

• Only an "eligible employer" may establish a SIMPLE IRA. An eligible employer is one with no more than 100 employees. An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100 employee limit.
• Employees are not required to make regular IRA contributions to their SIMPLE IRA account.
• The plan requires a certain minimum contribution from the employer. The employer may either (see http://www.irs.gov/retirement/article/0,,id=108941,00.html) match the contributions of employees dollar for dollar up to 3% of the employee's compensation (subject to certain rules that allow for lower contributions—see IRC Sec. 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes.
• The employee contribution limit is $11,500 for 2010, and $11,500 for 2011.
• A catch-up provision is available for participants over the age of 50. The extra catch-up contribution allowed remains $2,500 for years 2009 and 2010, as compared to $5,500 catch up available in a 401(k), 403(b), and 457 plans.
• The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).
• Unlike a 401(k), a SIMPLE IRA cannot be rolled over to a Traditional IRA without a waiting period (two years from the date the employee first participated in the plan).
• SIMPLE IRAs allow for smaller contribution limits than 401(k) or Deferred Contribution Plans.
• SEP IRAs and Traditional IRAs (among other retirement plans) cannot be "rolled over" into a SIMPLE IRA.