A SIMPLE, Savings Incentive Match Plan for Employees of Small Employers, is a retirement plan created to allow small employers offer all employees a way to make contributions for their own retirement. The employer will contribute to the SIMPLE via a matching or a non-elective contribution. The SIMPLE is also known as a SIMPLE IRA since the plan follows the Traditional IRA distribution rules.

In order to provide a SIMPLE retirement plan for oneself and employees, the employer must meet the following criteria:

1. He or she must have 100 employees or less.
2. He or she must not have another retirement plans unless it is a qualified plan for collective bargaining employees.
3. The plan is based on a calendar year.
4. The new SIMPLE retirement plan should be created between January 1 and October 1 for a given calendar year.

In tax year 2008, all contributions, both employee and employer, must follow these guidelines listed below:

1. Employee deferrals are $10,500 with a catch up deferral of $2,500 for those over age 50.
2. The employer must chose a matching contribution of up to 3% of salary or a nonelective contribution that will go to each employee regardless of he or she defer money from their paycheck.
3. All salary deferral contributions must be sent to the financial institution within 30 days of collection.
4. Employer contributions are due by their tax filing deadline plus all extensions.
5. All contributions must be in cash. No assets can fund a year’s contribution.

For a SIMPLE IRA distribution, remember that all distributions could be taxable and subject to penalties. These distributions follow the same rules as Traditional IRA distributions do with the exception of penalties.

1. Any distributions out of the SIMPLE or movement to a non-SIMPLE IRA within the first two years of beginning participation is subject to a 25% penalty.
2. Any normal distribution to a SIMPLE IRA holder that is 59 ½ or older is not subject to the 10% penalty. Note that the funds must age for at least 2 years for no penalties. These are taxable however.
3. A premature distribution is a distribution of SIMPLE assets to an owner who is under 59 ½. These funds and/or assets are subject to taxes and a 10% premature distribution penalty if the monies have aged 2 years or 25% penalty if taken out before the 2 year minimum. There are exceptions to this rule. They are:

   • Death of the SEP IRA holder
     
   • Disability of the SEP holder
   • Substantially Equal Payments/ 72(t)
   • Medical Expenses
   • Unemployment/Medical Insurance
   • First Time Home Purchase
   • Higher Education Expenses
     Note that Publication 590 will outline these and any other exceptions.
4. Withholding on distributions can be 10% of the distribution amount or any percentage or amount the owner discloses on the distribution paperwork. Or, the client may decide to forego any withholdings. This would also be disclosed on the distribution paperwork.
5. Required Minimum Distribution, RMD, is the mandatory distribution a person takes starting the year that they reach 70 ½. It is subject to Income Tax but not penalties.