The Savings Incentive Match Plan for Employees, or SIMPLE, is a relatively new plan that first became effective in 1997. It was designed to replace the SARSEP (Salary Reduction SEP IRA) due to its complex administrative duties and limitations for small businesses. The SIMPLE plan is available in two formats: the SIMPLE IRA, which we will focus on here, as well as the SIMPLE 401k. The SIMPLE IRA is flexible, easy to administer, and less expensive than 401k plans. They can be established by sole proprietors, partnerships, or businesses with less than 100 eligible employees. Like 401k's offered by large companies to their employees, the SIMPLE IRA plan allows small businesses to provide a retirement program without being solely responsible for contributing to the plan. Contributions to a SIMPLE are a combination of employee salary deferrals, with a small company contribution.

Distinguishing between eligible employers and eligible employees in a SIMPLE IRA plan is often confusing. In order for an employer to be eligible to adopt a SIMPLE IRA, they must meet the following criteria:

• On any day in the preceding tax year, they employed 100 or fewer employees who received at least $5,000 in compensation.
• They do not maintain another employer-sponsored retirement plan, such as a SEP, Keogh, or 401k.

Like most retirement plans, employers have some discretion as to how soon their employees will be eligible to participate. The requirements for the SIMPLE IRA are not solely based on full-time or part-time status, but in some cases could exclude a part-time employee or delay participation of an employee who has been hired by the employer late in the year. The most restrictive an employer could be regarding eligibility is to require that an employee has received $5,000 in compensation in any two prior years (not necessarily consecutive), and are reasonably expected to earn $5,000 the current year. An employer of course could be more lenient in the compensation required, or offer immediate eligibility. However, nonresident aliens and employees covered by retirement plans through unions can be excluded. Once the employer sets the eligibility requirements, they cannot be changed until the next plan year.

Employee Elective Deferrals
Eligible employees who choose to participate in the SIMPLE IRA plan can defer 100% of their compensation up to $6,000 annually. They are not limited by a percentage of their income, only that they have $6,000 in earnings after FICA and FUTA taxes are deducted. This feature of the SIMPLE IRA often makes this plan ideal for someone who has a regular full-time job, but has a small amount of self-employment income from their own business. However, if they participate in a 401k or another SIMPLE IRA with their employer, they must be aware that an overall deferral limit of $10,500 per person applies. Any salary deferrals into the plan would reduce the employee's federal and state taxable income.

Employer Contributions
While most of the funding responsibility is shifted to employees in the SIMPLE IRA plan, employer contributions are mandatory. However, the financial obligation to employers is generally much less than a SEP or Keogh plan would require, and the employer contributions are tax-deductible as a business expense. Employers can choose between two funding options described below:

• Matching contribution: the employer matches dollar-for-dollar what the employee defers from their salary, generally up to 3% of their compensation but no more than $6,000 annually. The match can be reduced to as little as 1% of each participant's compensation, but only in 2 out of 5 years. This type of employer contribution would of course only go to those employees who have chosen to participate. No employer contribution can be given to an employee who does not have a salary deferral under this option. The maximum
• Non-elective contribution: this option requires a 2% contribution to all eligible employees, up to a maximum of $3,400. Under this method, the employer must make a contribution for all eligible employees, regardless of whether or not they participate in the form of a salary deferral.

Deadlines for SIMPLE IRA Plans
The deadline for establishing a SIMPLE IRA is somewhat different than retirement plans have required in the past. Since it is a salary deferral plan, the IRS wanted to provide at least some time for employees to have deductions taken out of their paychecks, and thus established a deadline of October 1 of the current tax year. The plan must be set up and employees notified by this deadline. Even though sole proprietors with no other employees can use the SIMPLE IRA plan, they are also subject to this deadline. The only exception applies to new businesses established after October 1. There is a 60-day election period at the adoption of a new SIMPLE IRA plan, as well as prior to a new plan year, in which employees have the right to enter into a salary reduction agreement or to modify or prior salary reduction agreement. For a newly established plan, salary deferrals can begin during this 60-day period, but can be modified or discontinued. After the 60 days, employers can usually specify through their plan document how frequently further modifications will be permitted, usually monthly, quarterly, or annually.

SIMPLE IRA Withdrawals
Participants in a SIMPLE IRA are able to withdraw their assets at any time, although an early withdrawal penalty may apply. To encourage retirement savings, distributions from a SIMPLE IRA during the first two years of an employee's participation are subject to a penalty of 25%, plus the ordinary income taxes. After two years of participation, the penalty is the same as on a Traditional IRA, at the rate of 10%. However, the penalty does not apply if the withdrawal is used for higher education expenses, a first-time home purchase (up to a limit of $10,000), certain medical expenses, or due to death, disability, or the attainment of age 59½.

Administration of SIMPLE IRA Plans
As mentioned above, SIMPLE plans were designed to replace the SARSEP plan, which involved complex top-heavy rules and limited the types and sizes of employers that could use it. The SIMPLE IRA was also designed to be easy to administer and less costly to employers than a 401k plan. It does not require complicated testing or annual filings with the IRS.

Making Additional IRA Contributions
Being covered by a SIMPLE IRA does not prevent a participant from also contributing $2,000 to an Individual Retirement Account, either the Traditional IRA or a Roth IRA. However, depending on your income level, it could affect your ability to deduct a Traditional IRA contribution. The IRS also has income limits regarding eligibility to contribute to a Roth. If you do qualify for a Roth IRA, you can maximize your tax deduction with your contributions through the SIMPLE IRA plan, and also take advantage of the tax-free earnings of a Roth IRA.