Matching and Nonelective (Mandatory) Contributions

You have two options for making SIMPE IRA contributions.

  • Matching Contributions (which is elective).
  • Nonelective Contributions (which is mandatory).

Matching contributions:

  • You make a dollar for dollar matching contribution of each employee's contribution up to 3% of the employee's gross pay.
  • You may choose to contribute less than 3%, but no less than 1%. If you choose a lower percentage than 3%, you must notify the employee of the lower match within a reasonable period of time before the 60-day election period for the calendar year.
  • The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). The dates of this period are modified if you set up a SIMPLE IRA plan in mid year (i.e. July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.
  • If the employee makes no contributions out of his/her own pay, that employee does not receive matching employer contributions.

Nonelective contributions:

  • If you choose this option for making contributions, you must make them even if employees do not make their own contributions.
  • Your contribution percentage is 2% of each eligible employee's gross pay who has at least $5,000 (or some lower amount that you select) of compensation from you for the year.
  • For 2012, up to $250,000 of an employee's compensation may be taken into account to figure the contribution limit ($245,000 in 2011)

Federal Income Taxes and FICA Taxes

Employees:

  • Employee contributions are excluded from their gross wages and therefore, are not subject to federal income taxes.
  • However, employee contributions are not excluded from social security wages or Medicare wages and therefore, contributions are subject to social security and Medicare taxes.

Employers:

  • Employer matching or nonelective contributions are not subject to federal income taxes.
  • Unlike employee contributions, which ARE subject to FICA taxes (social security and Medicare taxes), an employer's contributions are NOT subject to FICA (or RRTA) taxes.
  • In addition, employer contributions are not subject to federal unemployment taxes (FUTA).
    • FUTA taxes are strictly an employer tax; employees never pay FUTA taxes. The FUTA tax is based on the first $7,000 of each employee's gross wages only.

Example: Matching Contributions

  • Jane Smith has an annual salary of $40,000
  • She contributes 5% of her salary to her SIMPLE IRA
  • Jane's yearly contribution is $2,000 (5% x $40,000)
  • Her employer's contribution is $1,200 (3% x $40,000)

Jane's $2,000 contribution is not subject to federal income taxes. But the $2,000 is subject to FICA taxes.

On the other hand, her employer's contributions are not subject to federal income taxes or FICA taxes (not even FUTA taxes).

Example: Nonelective Contributions -

  • John Money has an annual salary of $40,000
  • He chooses not to make any SIMPLE IRA contributions
  • The employer must contribute $800 (2% x $40,000) to John's SIMPLE IRA.

The employer's contributions are not subject to federal income taxes or FICA taxes or FUTA taxes.

Self-employed persons:

For retirement plan purposes a self-employed person is considered both:

  • An "employee" of his/her business and
  • his/her own "employer"

As a result, you're allowed to make two separate contributions for yourself:

  • One as "employee"
  • Another as "employer"

Example:

Contribution for yourself as an "employee":

If your business compensation was $40,000 and your contribution rate was 10%, as an "employee", you could contribute $4,000 (10% x $40,000) to your SIMPLE IRA.

Contribution for yourself as your own "employer":

Now, in your capacity as your own "employer", you can also make a matching (or nonelective) contribution for yourself.

Assume you make a matching contribution of 3%.

  • With compensation of $40,000 you can make a contribution of $1,200 (3% x $40,000 compensation).

Your total Contribution: $5,200.

Your total contribution is made up of:

  • Your $4,000 (10% x $40,000) as "employee" plus
  • Your matching contribution of $1,200 (3% x $40,000) as your own "employer".

Taxes for Self-Employed:

Although matching and nonelective contributions made by an employer are not subject federal income taxes or FICA taxes, contributions made by a self-employed person are subject to self-employment taxes.

Choosing a Lower Matching Percentage

You can choose a lower matching percentage for a limited period of time.

However, the lower percentage may not be less than 1% and you must notify the employees of the lower match within a reasonable period of time before the 60-day election period for the calendar year.