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CASE STUDY

Establishing a SIMPLE IRA

plan for a company with only a

few employees

Editor: A SIMPLE IRA plan can be adopted during the 60-day period before the
Trenda B. Hackett, CPA by employers that maintain no other beginning of any year, to make elective
qualified retirement plans and that salary-deferral contributions under the
generally have no more than 100 SIMPLE IRA plan for such year and
employees with compensation of to modify any previous elections (Sec.
$5,000 or more per year. A SIMPLE 408(p)(5)(C)). Employees must be al-
IRA plan allows employees to make lowed to stop making elective contribu-
elective salary-deferral contributions tions at any time during the year. The
to an individual retirement account plan may provide that employees who
(IRA), expressed as a percentage of do so cannot resume them until the
compensation, up to $15,500 per year beginning of the next year.
A SIMPLE IRA for 2023 (Secs. 408(p)(2)(A)(i), (ii),
may be ideal for and (E); Notice 2022-55). Compen- Making mandatory employer
smaller companies sation includes amounts that must be contributions under a SIMPLE IRA
reported by the employer on Form
The employer is required to make pay-
desiring to provide W-2, Wage and Tax Statement, plus ments to each employee’s SIMPLE IRA
their employees a any elective contributions from the under one of the following formulas:
Matching contribution for-
employee. SIMPLE IRA plans may
retirement plan. allow individuals who have attained mula: The employer generally is re-
at least age 50 by the calendar year quired to match each employee’s elective
end to make additional catch-up contributions dollar for dollar, up to 3%
contributions (Sec. 414(v)(5)(A)). For of the employee’s compensation (Sec.
2023, the maximum allowable catch- 408(p)(2)(A)(iii)). A special rule allows
up contribution is $3,500 (Sec. 414(v) the employer, in no more than two out
(2)(B)(ii); Notice 2022-55). of any five years, to elect a lower rate
Each employee who receives at (but not less than 1%) for all employees.
least $5,000 in compensation from The employer must notify employees of
the employer during any two prior the intended match rate within a rea-
years and who is reasonably expected sonable time before the 60-day election
to earn at least $5,000 in the current period for the year.
year must be eligible to participate in Nonelective contribution for-
the SIMPLE IRA plan (Sec. 408(p) mula: The employer is required to
(4)(A)). Self-employed individu- make a contribution equal to 2% of PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted from als are treated as employees for this compensation on behalf of each eligible
Checkpoint Tax Planning and Advisory purpose. Also, leased employees are employee (regardless of the employee’s
Guide’s Closely Held C Corporations
topic. Published by Thomson Reuters, required to be included if they meet salary-deferral contribution, if any).
Carrollton, Texas, 2023 (800-431-9025; the salary requirements (Sec. 414(n)). For this purpose, compensation of each
tax.thomsonreuters.com). Each eligible employee may elect, eligible employee is limited to $330,000

44 January 2023 The Tax Adviser