Matching and Nonelective (Mandatory) Contributions
You have two options for making SIMPE IRA contributions.
- Matching Contributions (which is elective).
- Nonelective Contributions (which is mandatory).
- 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.
- 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
- 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.
- 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).
- NOTE: 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.
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"
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.
- Return to the Retirement Plans Table of Contents to find related links