![]() ![]() Employers make either dollar-for-dollar matching contributions equal to 1% to 3% of their employees’ salary, or non-elective contributions equal to 2% of salary, regardless of whether a worker contributes. Employees can choose whether they want to contribute employers must make contributions.Įmployees may choose to save pre-tax income in their accounts, which provides the benefit of lowering their overall taxable income. ![]() How Does a SIMPLE IRA Work?Ī SIMPLE IRA, also known as a Savings Incentive Match Plan for Employees, is ideal for small business owners because it lacks the reporting requirements and paperwork that’s required for many other types of workplace retirement plans, like 401(k)s.īoth employers and employees can contribute money to a SIMPLE IRA. Like other workplace retirement plans, both employers and employees can contribute to a SIMPLE IRA and get access to valuable tax benefits. The SEP Compensation Limit is applied in determining the maximum contributions made to the plan.ĮGTRRA also added the Top-heavy plan key employee compensation limit.Ĭatch up Contributions, SIMPLE “Catch up” deferral: Under the Economic Growth and Tax Relief Act of 2001 (EGTRRA), certain individuals aged 50 or over can now make so-called ‘catch up’ contributions, in addition to the above limits.A SIMPLE IRA is a retirement savings plan tailored to the needs of small business owners and sole proprietors. SEP Coverage Limit is the minimum earnings level for a self-employed individual to qualify for coverage by a Simplified Employee Pension plan (a special individual retirement account to which the employer makes direct tax-deductible contributions. SIMPLE plans are simplified retirement plans for small businesses that allow employees to make elective contributions, while requiring employers to make matching or nonelective contributions. The SIMPLE Contribution Limit is the maximum annual contribution that can be made to a SIMPLE (Savings Incentive Match Plan for Employees) plan. The Highly Compensated Threshold (section 414(q)(1)(B)) is the minimum compensation level established to determine highly compensated employees for purposes of nondiscrimination testing. The 457 Deferral Limit is a similar restriction, applied to certain government plans (457 plans). In calculating certain nondiscrimination tests (such as the Actual Deferral Percentage), all participant compensation is limited to this amount, for purposes of the calculation. This limit is also imposed in determining the Annual Benefit Limit (above). In calculating contribution allocations, a plan cannot consider any employee compensation in excess of the Annual Compensation Limit (401(a)(17)). This limit is actually expressed as the lessor of the dollar limit or 100% of the participant’s compensation, applied to the combination of employee contributions, employer contributions and forfeitures allocated to a participant’s account. The Annual Contribution Limit is the maximum annual contribution amount that can be made to a participant’s account (IRC section 415). The participant compensation level is also subjected to the Annual Compensation Limit noted below. ![]() The limit applied is actually the lessor of the dollar limit above or 100% of the participant’s average compensation (generally the high three consecutive years of service). The Annual Benefit Limit is the maximum annual benefit that can be paid to a participant (IRC section 415). Some still refer to this as the $7,000 limit (its original setting in 1987). The Elective Deferral Limit is the maximum contribution that can be made on a pre-tax basis to a 401(k) or 403(b) plan (Internal Revenue Code section 402(g)(1)). ![]()
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