The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made.taxmap/pubs/p590-022.htm#en_us_publink10006560
Salary reduction contributions (employee-chosen contributions or elective deferrals) that your employer can make on your behalf under a SIMPLE plan are limited to $10,500 for 2008.
If you are a participant in any other employer plans during 2008 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 $15,500 for 2008 on exclusions of salary reductions and other elective deferrals.
You, not your employer, are responsible for monitoring compliance with these limits.
Additional elective deferrals can be contributed to your SIMPLE if:
- You reached age 50 by the end of 2008, 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.
The most that can be contributed in additional elective deferrals to your SIMPLE is the lesser of the following two amounts.
- $2,500 for 2008, or
- Your compensation for the year reduced by your other elective deferrals for the year.
The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them. taxmap/pubs/p590-022.htm#en_us_publink10006562
Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. These matching contributions cannot be more than 3% of your compensation for the calendar year. See Matching contributions less than 3%
In 2008, Joshua was a participant in his employer's SIMPLE plan. His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Instead of taking it all in cash, Joshua elected to have 12.5% of his weekly pay ($100) contributed to his SIMPLE IRA. For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $10,500 limit on these contributions.
Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. 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).taxmap/pubs/p590-022.htm#en_us_publink10006564
Assume the same facts as in Example 1, except that Joshua's compensation for the year was $357,142 and he chose to have 2.94% of his weekly pay contributed to his SIMPLE IRA.
In this example, Joshua's salary reduction contributions for the year (2.94% × $357,142) were equal to the 2008 limit for salary reduction contributions ($10,500). Because 3% of Joshua's compensation ($10,714) is more than the amount his employer was required to match ($10,500), his employer's matching contributions were limited to $10,500.
In this example, total contributions made on Joshua's behalf for the year were $21,000, the maximum contributions permitted under a SIMPLE IRA for 2008.taxmap/pubs/p590-022.htm#en_us_publink10006565
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.
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%. 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%.taxmap/pubs/p590-022.htm#en_us_publink10006566
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. For 2008, only $230,000 of your compensation can be taken into account to figure the contribution limit.
Your employer can substitute the 2% nonelective contribution for the matching contribution for a year, if both of the following requirements are met.
- Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution.
- This notice is provided within a reasonable period during which employees can enter into salary reduction agreements.
Assume the same facts as in Example 2, except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Because his employer's nonelective contributions are limited to 2% of up to $230,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $4,600. In this example, total contributions made on Joshua's behalf for the year were $15,100 (Joshua's salary reductions of $10,500 plus his employer's contribution of $4,600). taxmap/pubs/p590-022.htm#en_us_publink10006568
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. For more information, see Recharacterizations
in chapter 1.
You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. SEPs are discussed in Publication 560. SIMPLE plans are discussed in this chapter. taxmap/pubs/p590-022.htm#en_us_publink10006570
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.