As the name implies a SIMPLE plan—short for Savings Incentive Match Plan for Employees—is simple to set up and manage. Typically, these accounts operate like traditional IRAs. Now the new SECURE Act 2.0 enacted late last year makes it easier for SIMPLE plan participants to save more for retirement.
Background: To qualify to use a SIMPLE, a business can’t employ more than 100 workers. This includes all employees who have earned at least $5,000 in the previous year. Any employee who has been paid at least $5,000 in compensation for any two previous years at the company—and who expects to receive at least that amount in the current year— is eligible to participate in the plan.
If the employer chooses, it can establish less restrictive eligibility requirements. Note that this type of plan is also available to self-employed individuals.
The contribution limits are indexed annually for inflation. For 2023, the maximum contribution is $15,500. Plus, an employee age 50 or older can add a “catch-up contribution” of up to $3,500, for a maximum total of $19,000. Generally, the employer must provide matching elective contributions of up to 3% of compensation (but not less than 1% in no more than two out of five years) or non-elective contributions of 2% of each eligible employee’s compensation (based on a maximum compensation of $330,000 in 2023). These contributions are deductible by the employer.
SECURE Act 2.0 raises the ante. Beginning in 2024, the catch-up contribution limit for a SIMPLE plan is increased by 10% for employers with no more than 25 employees. Employers with 26-100 employees may provide these higher limits if they make a 4% matching contribution or a 3% employer contribution.
In addition, the new law creates a new SIMPLE plan catch-up contribution limit for those age 60-63 years. Beginning in 2025, the limit for that group is equal to the greater of $5,000 or 150% of the regular 2025 catch-up contribution amount. This will also be adjusted annually for inflation after 2025.
Note that contributions to SIMPLEs vest immediately. Thus, employees have the ability to withdraw funds from the plan at any time, subject to an early withdrawal penalty. However, withdrawals made prior to age 59½ that don’t qualify under one of the tax law exceptions are hit with a penalty tax.
Caution: The usual 10% penalty for an early withdrawal from a qualified plan is increased to 25% during the first two years of participation in the SIMPLE. After two years, it reverts to the normal 10% penalty.
The required minimum distribution (RMD) rules apply to SIMPLEs. Beginning in 2023, the new law increases the age threshold to 73, up from 72 under the initial SECURE Act. (This threshold is now scheduled to increase to age 75 in 2033.)
Finally, a SIMPLE plan taking effect this year may be set up anytime during the year before October 1. The employer doesn’t have to file an annual return for the plan nor is nondiscrimination testing required. Obtain professional assistance.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
