Can an Employer's Contribution Exceed an Employee's Contribution on a SIMPLE IRA?

by Deborah Barlowe

A SIMPLE IRA plan consists of the individual retirement accounts established on behalf of each of an employer’s eligible employees. The Internal Revenue Service (IRS) allows employees to choose to contribute to their retirement accounts while requiring their employer to make annual contributions to the plan. Whether an employer’s contribution to an employee’s account exceeds the employee’s contribution depends on several factors, including how the employer calculates its contributions.

Eligibility

The IRS permits an employer to identify its own standards of eligibility in its SIMPLE IRA plan document, within limits. The IRS requires an employer to consider an employee eligible to benefit from his employer’s SIMPLE IRA plan if the employer expects to pay him at least $5,000 in the current year and the employee earned at least $5,000 in either of the two years preceding his enrollment in the plan.

Participation

Even if an employee is eligible to benefit from his employer’s SIMPLE IRA plan, he retains his right to choose to participate in the plan. An employee participates in a SIMPLE IRA plan if he elects to defer a portion of his salary into his retirement account. As of the date of publication, the IRS allows an employee under age 50 to electively defer up to $11,500 of his compensation into his SIMPLE IRA. The IRS permits an employee who is 50 or above to defer an additional $2,500 into his retirement account.

Matching Employer Contributions

The IRS allows an employer to choose between making matching contributions and nonelective contributions to its SIMPLE IRA plan. If an employer elects to make matching contributions, the IRS requires the employer to contribute to the retirement accounts of every employee participating in the SIMPLE IRA plan. In general, an employer making matching contributions contributes the lesser of 3 percent of an employee’s pay or $245,000 into a participating employee’s retirement account. If an employee chooses to defer 2 percent of his $200,000 annual pay into his SIMPLE IRA account, he will contribute $4,000 to his retirement account in a year. If his employer makes a matching contribution of 3 percent of the employee’s compensation, the employer will contribute $6,000 in the same year.

Nonelective Employer Contributions

If an employer elects to make nonelective annual contributions to its SIMPLE IRA plan, the IRS requires the employer to contribute to the retirement accounts of every employee eligible to benefit from the retirement plan regardless of whether they participate in the plan or not. An employer making nonelective contributions must contribute 2 percent of an employee’s first $245,000 of compensation to the employee’s IRA if he is eligible to benefit from the SIMPE IRA plan. If an employee who earns $100,000 per year is eligible to participate in his employer’s SIMPLE IRA plan, but chooses not to participate, he contributes nothing to his retirement account. If an employer makes nonelective contributions to its retirement plan, the employer will contribute $2,000 to the employee’s SIMPLE IRA despite the employee’s refusal to participate in the retirement plan.

About the Author

Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.

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