Some of our employees started or stopped contributing to our SIMPLE IRA plan in the middle of the year. Are we required to make our 3% match based on the employees’ compensation for the entire calendar year or only the compensation earned during the period they actually contributed to the plan?
You must base your SIMPLE IRA plan employer matching contribution on an employee’s entire calendar-year compensation, regardless of when the employee starts or stops contributing during the year.
- Bob’s annual salary is $50,000 and he starts contributing to his employer’s SIMPLE IRA plan on September 1. He contributes $1,536 through December 31. Bob’s employer must match Bob’s contributions up to 3% of Bob’s calendar-year compensation, or $1,500 (3% of $50,000). It doesn’t
matter that Bob only contributed to the plan during the last 4 months of the calendar year.
- John, age 56, earns $60,000 a year. He made the maximum salary reduction contribution for 2011 of $14,000 ($11,500 plus $2,500 catch-up contributions) to his employer’s SIMPLE IRA plan from January 1 to September 30. John’s employer is required to match John’s contribution up to
3% of his entire calendar-year compensation or $1,800 (3% of $60,000), even though John stopped contributing to the plan on September 30.
- Joe’s annual salary is $70,000 and he contributed 1% of his compensation, or $700, to his employer’s SIMPLE IRA plan. Joe’s employer must make a matching contribution of $700 because the employer is only required to match the amount Joe actually contributes during the year up to
a maximum of 3% of his calendar-year compensation.
An employer can make matching contributions to an employee’s SIMPLE IRA:
- on a per-pay-period basis, or
- by the due date of the employer’s tax return (including extensions).
from: Retirement New for Employers, IRS, Winter 2012
CIRCULAR 230 DISCLOSURE: To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein. Likewise, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS.