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Amendment TaxesAmendment taxes 3. Amendment taxes Savings Incentive Match Plans for Employees (SIMPLE) Table of Contents Introduction What Is a SIMPLE Plan?Eligible Employees How Are Contributions Made? How Much Can Be Contributed on Your Behalf?Matching contributions less than 3%. Amendment taxes Traditional IRA mistakenly moved to SIMPLE IRA. Amendment taxes When Can You Withdraw or Use Assets?Are Distributions Taxable? Introduction This chapter is for employees who need information about savings incentive match plans for employees (SIMPLE plans). Amendment taxes It explains what a SIMPLE plan is, contributions to a SIMPLE plan, and distributions from a SIMPLE plan. Amendment taxes Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as: Part of a 401(k) plan, or A plan using IRAs (SIMPLE IRA). Amendment taxes This chapter only discusses the SIMPLE plan rules that relate to SIMPLE IRAs. Amendment taxes See chapter 3 of Publication 560 for information on any special rules for SIMPLE plans that do not use IRAs. Amendment taxes If your employer maintains a SIMPLE plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution. Amendment taxes See Rollovers and Transfers Exception, later under When Can You Withdraw or Use Assets. Amendment taxes What Is a SIMPLE Plan? A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Amendment taxes See chapter 3 of Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan. Amendment taxes A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to: Reduce your compensation (salary) by a certain percentage each pay period, and Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. Amendment taxes These contributions are called salary reduction contributions. Amendment taxes All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. Amendment taxes The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Amendment taxes Contributions are made on behalf of eligible employees. Amendment taxes (See Eligible Employees below. Amendment taxes ) Contributions are also subject to various limits. Amendment taxes (See How Much Can Be Contributed on Your Behalf , later. Amendment taxes ) In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. Amendment taxes See How Are Contributions Made , later. Amendment taxes You may be able to claim a credit for contributions to your SIMPLE plan. Amendment taxes For more information, see chapter 4. Amendment taxes Eligible Employees You must be allowed to participate in your employer's SIMPLE plan if you: Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made. Amendment taxes Self-employed individual. Amendment taxes For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income. Amendment taxes Excludable employees. Amendment taxes Your employer can exclude the following employees from participating in the SIMPLE plan. Amendment taxes Employees whose retirement benefits are covered by a collective bargaining agreement (union contract). Amendment taxes Employees who are nonresident aliens and received no earned income from sources within the United States. Amendment taxes Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year. Amendment taxes Compensation. Amendment taxes For purposes of the SIMPLE plan rules, your compensation for a year generally includes the following amounts. Amendment taxes Wages, tips, and other pay from your employer that is subject to income tax withholding. Amendment taxes Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457) plans, SEP plans, and SIMPLE plans. Amendment taxes Self-employed individual compensation. Amendment taxes For purposes of the SIMPLE plan rules, if you are self-employed, your compensation for a year is your net earnings from self-employment (Schedule SE (Form 1040), Section A, line 4, or Section B, line 6) before subtracting any contributions made to a SIMPLE IRA on your behalf. Amendment taxes For these purposes, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. Amendment taxes How Are Contributions Made? Contributions under a salary reduction agreement are called salary reduction contributions. Amendment taxes They are made on your behalf by your employer. Amendment taxes Your employer must also make either matching contributions or nonelective contributions. Amendment taxes Salary reduction contributions. Amendment taxes During the 60-day period before the beginning of any year, and during the 60-day period before you are eligible, you can choose salary reduction contributions expressed either as a percentage of compensation, or as a specific dollar amount (if your employer offers this choice). Amendment taxes You can choose to cancel the election at any time during the year. Amendment taxes Salary reduction contributions are also referred to as “elective deferrals. Amendment taxes ” Your employer cannot place restrictions on the contributions amount (such as by limiting the contributions percentage), except to comply with the salary reduction contributions limit, discussed under How Much Can Be Contributed on Your Behalf, later. Amendment taxes Matching contributions. Amendment taxes Unless your employer chooses to make nonelective contributions, your employer must make contributions equal to the salary reduction contributions you choose (elect), but only up to certain limits. Amendment taxes See How Much Can Be Contributed on Your Behalf below. Amendment taxes These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees (defined earlier) who chose salary reductions. Amendment taxes These contributions are referred to as matching contributions. Amendment taxes Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions. Amendment taxes Nonelective contributions. Amendment taxes Instead of making matching contributions, your employer may be able to choose to make nonelective contributions on behalf of all eligible employees. Amendment taxes These nonelective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from your employer, whether or not the employee chose salary reductions. Amendment taxes One of the requirements your employer must satisfy is notifying the employees that the election was made. Amendment taxes For other requirements that your employer must satisfy, see chapter 3 of Publication 560. Amendment taxes How Much Can Be Contributed on Your Behalf? The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made. Amendment taxes Salary reduction contributions limit. Amendment taxes Salary reduction contributions (employee-chosen contributions or elective deferrals) that your employer can make on your behalf under a SIMPLE plan are limited to $12,000 for 2013. Amendment taxes The limitation remains at $12,000 for 2014. Amendment taxes If you are a participant in any other employer plans during 2013 and you have elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the annual limit of $17,500 for 2013 on exclusions of salary reductions and other elective deferrals. Amendment taxes You, not your employer, are responsible for monitoring compliance with these limits. Amendment taxes Additional elective deferrals can be contributed to your SIMPLE plan if: You reached age 50 by the end of 2013, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit. Amendment taxes The most that can be contributed in additional elective deferrals to your SIMPLE plan is the lesser of the following two amounts. Amendment taxes $2,500 for 2013, or Your compensation for the year reduced by your other elective deferrals for the year. Amendment taxes The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. Amendment taxes The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them. Amendment taxes Matching employer contributions limit. Amendment taxes Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. Amendment taxes These matching contributions cannot be more than 3% of your compensation for the calendar year. Amendment taxes See Matching contributions less than 3% below. Amendment taxes Example 1. Amendment taxes In 2013, Joshua was a participant in his employer's SIMPLE plan. Amendment taxes His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Amendment taxes Instead of taking it all in cash, Joshua elected to have 12. Amendment taxes 5% of his weekly pay ($100) contributed to his SIMPLE IRA. Amendment taxes For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $12,000 limit on these contributions. Amendment taxes Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Amendment taxes Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600). Amendment taxes Example 2. Amendment taxes Assume the same facts as in Example 1 , except that Joshua's compensation for the year was $408,163 and he chose to have 2. Amendment taxes 94% of his weekly pay contributed to his SIMPLE IRA. Amendment taxes In this example, Joshua's salary reduction contributions for the year (2. Amendment taxes 94% × $408,163) were equal to the 2013 limit for salary reduction contributions ($12,000). Amendment taxes Because 3% of Joshua's compensation ($12,245) is more than the amount his employer was required to match ($12,000), his employer's matching contributions were limited to $12,000. Amendment taxes In this example, total contributions made on Joshua's behalf for the year were $24,000 ($12,000 (Joshua's contributions) + $12,000 (matching contributions)), the maximum contributions permitted under a SIMPLE IRA for 2013. Amendment taxes Matching contributions less than 3%. Amendment taxes Your employer can reduce the 3% limit on matching contributions for a calendar year, but only if: The limit is not reduced below 1%, The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements. Amendment taxes For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which your employer (or a former employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. Amendment taxes If your employer chooses to make nonelective contributions for a year, that year also will be treated as a year for which the limit was 3%. Amendment taxes Nonelective employer contributions limit. Amendment taxes If your employer chooses to make nonelective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of your compensation for the entire year. Amendment taxes For 2013, only $255,000 of your compensation can be taken into account to figure the contribution limit. Amendment taxes Your employer can substitute the 2% nonelective contribution for the matching contribution for a year if both of the following requirements are met. Amendment taxes Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution. Amendment taxes This notice is provided within a reasonable period during which employees can enter into salary reduction agreements. Amendment taxes Example 3. Amendment taxes Assume the same facts as in Example 2 , except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Amendment taxes Because his employer's nonelective contributions are limited to 2% of up to $255,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $5,100. Amendment taxes In this example, total contributions made on Joshua's behalf for the year were $17,100 (Joshua's salary reductions of $12,000 plus his employer's contribution of $5,100). Amendment taxes Traditional IRA mistakenly moved to SIMPLE IRA. Amendment taxes If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA. Amendment taxes For more information, see Recharacterizations in chapter 1. Amendment taxes Recharacterizing employer contributions. Amendment taxes You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. Amendment taxes SEPs are discussed in chapter 2 of Publication 560. Amendment taxes SIMPLE plans are discussed in this chapter. Amendment taxes Converting from a SIMPLE IRA. Amendment taxes Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained in chapter 1 under Converting From Any Traditional IRA Into a Roth IRA . Amendment taxes However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer. Amendment taxes When Can You Withdraw or Use Assets? Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. Amendment taxes These rules are discussed in chapter 1. Amendment taxes Your employer cannot restrict you from taking distributions from a SIMPLE IRA. Amendment taxes Are Distributions Taxable? Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. Amendment taxes If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. Amendment taxes See Additional Tax on Early Distributions, later. Amendment taxes Rollovers and Transfers Exception Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. Amendment taxes Two-year rule. Amendment taxes To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. Amendment taxes The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA. Amendment taxes After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). Amendment taxes Additional Tax on Early Distributions The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. Amendment taxes If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%. Amendment taxes If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed. 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