Traditional and Roth IRAs have lower contribution limits than SIMPLE IRAs. The IRS limits contributions to a SIMPLE IRA, as it does to other plans. These limits can alter from year to year. See the contribution limits for SIMPLE IRAs in 2021 below.
Employee SIMPLE IRA Contribution Limits for 2021
In 2021, an employee’s SIMPLE IRA contribution cannot exceed $13,500. Employees over the age of 50 can make a catch-up contribution of $3,000 per year. If you enroll in any other employment plan during the year, you can contribute a total of $19,500 in voluntary deferrals to all plans.
Employer SIMPLE IRA Contribution Limits for 2021
Employer contributions can be a match of the amount contributed by the employee, up to 3% of their salary. Employers may choose to reduce the matching limit to less than 3%. An employer, on the other hand, cannot drop the threshold below 1%, and she cannot do it for more than two out of every five years. If your employer intends to adjust a match amount during the 60-day election period, she must provide you sufficient notice.
Another alternative is for the employer to contribute 2% of the employee’s income as a non-elective payment. This means that regardless of what the employee performs, the employer is compelled to contribute. Because the IRS considers an employee’s salary of up to $290,000, this option effectively has a $5,600 employer contribution cap.
How much can an employer contribute to a SIMPLE IRA 2020?
Elective deferrals are limited to $20,500 in 2022, $19,500 in 2020 and 2021, $19,000 in 2019, $18,500 in 2018, and $18,000 in 2015-2017, or 100% of the employee’s remuneration, whichever is less. In 2020, 2021, and 2022, the optional deferral ceiling for SIMPLE plans is 100% of pay, or $13,500, $13,000 in 2019, and $12,500 in 2018. If the employee is 50 or older, he or she may be eligible for catch-up contributions.
The difference between the employee’s total contributions and the deferral maximum is reflected in the employee’s gross income.
Can an employer contribute to a SIMPLE IRA?
Contributions to SIMPLE IRAs by Employers Employers can choose to match up to 3% of a worker’s pay dollar for dollar or contribute a flat 2% of remuneration, regardless of whether or not the employee contributes.
What is the max an employer can contribute to a SIMPLE IRA?
Contribution cap for employers Employers can either: match their employees’ contributions dollar for dollar up to a maximum of 3% of each employee’s pay, with no limit; or match their employees’ contributions dollar for dollar up to a maximum of 3% of each employee’s salary, with no limit.
Can contributions made under a SIMPLE IRA plan be made to any type of IRA?
A SIMPLE IRA contribution can only be made to a SIMPLE IRA, not to any other type of IRA.
What is a salary reduction contribution?
A salary reduction contribution is money that an employee chooses to put into his or her SIMPLE IRA instead of being paid in cash. Employers must allow employees to choose to have salary reduction contributions made at a level determined by the employee, expressed as a percentage of annual compensation or a particular dollar amount. Except to comply with the yearly limit on salary reduction contributions, an employer may not impose any restrictions on the amount of salary reduction payments made by an employee.
How much may an employee defer under a SIMPLE IRA plan?
In 2020 and 2021, an employee can defer up to $13,500 ($13,000 in 2018; $12,500 in 20162018, subject to cost-of-living adjustments in subsequent years). Employees over the age of 50 can contribute up to $3,000 in catch-up contributions between 2016 and 2021. (subject to cost-of-living adjustments for later years). SIMPLE IRA salary reduction contributions are “elective deferrals” that contribute toward an employee’s overall annual limit on elective deferrals to this and other plans that allow elective deferrals.
How much must I contribute for my employees participating in our SIMPLE IRA plan?
- match each employee’s salary reduction contribution dollar for dollar up to 3% of their annual compensation (not limited by the annual compensation cap), or
- make non-elective contributions of 2% of the employee’s pay up to a maximum of $290,000 in 2021 ($285,000 in 2020), subject to cost-of-living increases in subsequent years. You must provide nonelective contributions for all eligible employees, whether or not they make salary reduction contributions, if you want to do so.
Can I reduce the 3-percent matching contribution?
You can choose to reduce your 3-percent matching contributions for a calendar year if you meet the following criteria:
- The limit isn’t reduced for more than 2 years out of the 5-year period ending with (and including) the election’s effective year; and
- You tell employees of the decreased ceiling in a reasonable amount of time before the 60-day election period, during which they might agree to a wage reduction.
Any year prior to the first year in which you (or a predecessor employer) maintained a SIMPLE IRA plan will be viewed as a year in which the limit was 3 percent. If you opt to make nonelective contributions for a year, that year will be handled as if the cap had been raised to 3%.
Can I suspend, reduce or increase the amount of matching contributions to our SIMPLE IRA plan in the middle of the year?
You can’t stop or change your employer matching contributions in the middle of the year. You must make the contributions that you agreed to make in the SIMPLE IRA plan notice to your employees.
May I make nonelective contributions instead of matching contributions?
You can make nonelective contributions equivalent to 2% of each eligible employee’s compensation for the whole calendar year instead of matching contributions under a SIMPLE IRA plan. Regardless of whether the employee chooses to make salary reduction contributions for the calendar year, you must make the nonelective payments for each eligible employee. You can, but aren’t obligated to, limit nonelective contributions to eligible employees with a yearly salary of at least $5,000 (or a smaller amount determined by the company).
For a year, you may substitute the 2% non-elective contribution for the matching contribution if:
- You inform eligible employees that instead of a matching payment, a 2% non-elective contribution would be provided; and
- This notice is given to employees in a reasonable amount of time before the 60-day election period, during which they can agree to a pay cut.
Do compensation limits apply when calculating the 2-percent nonelective contribution?
Compensation taken into account for the 2-percent nonelective contribution must be limited to $290,000 in 2021 ($285,000 in 2020), subject to cost-of-living increases in succeeding years.
Do I have to contribute for a participant who isn’t employed on the last day of the year?
You certainly do. There can’t be a last-day-of-the-year employment requirement in a SIMPLE IRA plan. Any SIMPLE IRA contribution must be shared by the employee if they are otherwise eligible. This includes employees who pass away or quit their jobs before the contribution is made.
If an employee starts or stops salary reduction contributions in the middle of the year, can I make my 3% match based only on the compensation earned during the period they actually contributed?
No, regardless of when the employee starts or ends paying during the year, you must base your SIMPLE IRA plan employer matching contribution on the employee’s complete calendar-year compensation. The maximum matching contribution for the whole calendar year is always 3% of the employee’s compensation. Matching contributions can be provided on a per-pay-period basis or by the employer’s tax-filing deadline (including extensions).
For example, Bob earns $50,000 per year and begins contributing to his employer’s SIMPLE IRA plan on September 1. Until December 31, he gives $1,536. Bob’s company is required to match Bob’s contributions up to 3% of his annual pay, or $1,500 (3 percent of $50,000). It makes no difference that Bob only participated to the plan for the last four months of the year.
John, for example, makes $60,000 every year. From January 1 to September 30, he made a $12,000 salary reduction contribution to his employer’s SIMPLE IRA plan. Even though John stopped contributing to the plan on September 30, his employer is required to match his contribution up to 3% of his whole calendar-year compensation, or $1,800 (3 percent of $60,000).
For instance, Joe’s annual salary is $70,000, and he donated 1% of his pay, or $700, to his employer’s SIMPLE IRA plan. Because the employer is only allowed to match the amount Joe actually pays during the year up to a maximum of 3% of his calendar-year compensation, Joe’s employer must make a matching payment of $700.
Can I contribute to a SIMPLE IRA of a participant over age 72?
Yes, you really must. Employees who are 70 1/2 years old or older can contribute to their SIMPLE IRAs through salary deferral. Employers must continue to make matching or nonelective contributions to their employees’ SIMPLE IRAs once they reach the age of 72 (70 1/2 if they achieved that age before January 1, 2020), and they must also begin taking required minimum distributions from the account.
Employees may not be denied access to a SIMPLE IRA plan purely because of their age.
What happens if I don’t make the matching or non-elective contribution to the SIMPLE IRA plan?
To qualify for tax benefits, a SIMPLE IRA plan must follow specific guidelines. If you don’t follow these guidelines, for example, by not paying due contributions, you and the other members may lose out on tax benefits. Certain SIMPLE IRA plan flaws can be fixed. Review our SIMPLE IRA Plan Fix-It Guide and Correcting Plan Errors for more details.
When must I deposit the salary reduction contributions?
According to IRS requirements (IRC section 408(p)(5)(A)(i), you must deposit employees’ salary reduction contributions to their SIMPLE IRAs within 30 days of the end of the month in which the amounts would otherwise have been receivable to the employees in cash. The final day for submitting salary reduction contributions for a calendar year is 30 days after the end of the year, or January 30th, for self-employed persons without common-law workers.
It’s possible that the Department of Labor’s rule for depositing salary reduction payments will be more stringent. There is a seven-day safe harbor regulation in place.
When must I make the matching and nonelective contributions?
You must make matching and nonelective contributions to the financial institution that administers the SIMPLE IRA by the due date for filing your business’s income tax return, including extensions, for the taxable year that includes the last day of the calendar year in which the contributions were made. Regardless of when you file your tax return, if you extend it, you have until the end of the extension period to deposit contributions. If you did not deposit the contribution on time, you must amend your tax return and pay all applicable tax, interest, and penalties.
How much of the contributions made to employees’ SIMPLE IRAs may I deduct on my business’s tax return?
On your tax return, you can deduct all contributions paid to your workers’ SIMPLE IRAs.
Can employees deduct the salary reduction contributions they make to the SIMPLE IRA plan on their Form 1040?
Participants in a SIMPLE IRA plan cannot deduct their contributions from their income on their Form 1040. The “Wages, tips, and other compensation” line on Form W-2, Wage and Tax Statement, does not contain employee salary reduction payments to a SIMPLE IRA.
Are employer contributions to SIMPLE IRA tax deductible?
Contributions to a SIMPLE IRA are not subject to federal income tax withholding. Salary reduction contributions, on the other hand, are subject to social security, Medicare, and FUTA taxes. These taxes do not apply to matching and non-elective contributions.
Employer contribution deductions must be reported. Contributions to a SIMPLE IRA plan can be deducted by the employer.
- On Schedule C (Form 1040), Profit or Loss From Business, or Schedule F (Form 1040), Profit or Loss From Farming, sole owners can deduct SIMPLE IRA payments for workers.
- On Form1065, U.S. Return of Partnership Income, partnerships deduct contributions for employees.
- On Form 1040, U.S. Individual Income Tax Return, sole proprietors and partners can deduct contributions for themselves. (If you’re a partner, your contributions are shown on Schedule K-1 (Form 1065), Partner’s Share of Income, Credits, Deductions, and Other Items, which you receive from the partnership.)
- On Form 1120, U.S. Corporation Income Tax Return, Form 1120-A, U.S. Corporation Short-Form Income Tax Return, or Form 1120S, U.S. Income Tax Return for a S Corporation, corporations deduct donations.
How can I tell if my plan is operating within the rules?
To assist evaluate whether your SIMPLE IRA plan is working within the rules, you should undertake an annual self-audit. Periodic assessments of your plan might be aided by checklists and advice.
Can an employee make a lump sum contribution to a SIMPLE IRA?
Your employer must make your salary reduction contributions to the SIMPLE IRA no later than the end of the 30-day period following the month in which you would normally receive that money in your paycheck. Employer contributions to your SIMPLE IRA can be made on a regular basis or in one lump payment, as long as they are made before the employer’s tax return filing date (including extensions).
What happens if you contribute too much to SIMPLE IRA?
An “excess contribution” is any money contributed to your SIMPLE IRA that exceeds the maximum limit. For each year that an excess contribution remains in your SIMPLE IRA, it is subject to a 6% excise tax. It is possible to correct an excess contribution without paying a penalty of 6%.
Do IRA contribution limits include employer match?
The answer is no, in a nutshell. Employer matching contributions are not deducted from your total contribution limit imposed by the Internal Revenue Service (IRS).
Do employer matches count towards limit?
A 401(k) is a tax-advantaged retirement plan offered by an employer. You put money into this account by putting a certain percentage of your paycheck into it. One of the most appealing features of a 401(k) plan is that your employer can match your payments up to a specific amount. Employer matches do not count toward the yearly contribution limit set by the IRS for 401(k) contributions. There is, however, a larger annual contribution cap for total contributions, which includes employer matching. A financial advisor can assist you with any and all queries you may have concerning your 401(k).
Can you contribute to a SIMPLE IRA outside of payroll?
Out-of-pocket donations to a SIMPLE IRA account are not permitted. Only your company can contribute to your SIMPLE IRA account, either as employer matching or non-elective contributions, or as a deposit of your elective deferrals from your paycheck. You’ll need to contact the SIMPLE IRA custodian to request a refund of the out-of-pocket amount (not a regular payout), and then make a fresh contribution to a different (non-SIMPLE) IRA account.
You’ll enter the regular contribution to the new account into TurboTax just like any other traditional IRA contribution. Traditional and Roth IRA Contributions can be found under Deductions and Credits -> Retirement and Investments -> Traditional and Roth IRA Contributions.
How is simple IRA employer match calculated?
A 401(k) match from an employer is normally a dollar-for-dollar match up to 6% of the employee’s salary, or 50 cents on the dollar. If your staff’s total salary are $500,000, for example, a dollar-for-dollar match would be $30,000 if each employee contributed the maximum amount.