facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Congress Makes SIMPLE IRA Plans Less Simple Thumbnail

Congress Makes SIMPLE IRA Plans Less Simple

SIMPLE IRA plans are a popular retirement savings option for small businesses. The plans are available for companies with 100 or fewer employees who received at least $5,000 in pay from the company in the prior year.

SIMPLE IRAs are designed to be administratively easier than 401(k) plans. However, the rules governing SIMPLE IRA plans are confusing. In some cases they are treated like IRAs, and in other cases they are treated like workplace plans.SIMPLE IRAs are designed to be administratively easier than 401(k) plans. Businesses can establish a SIMPLE by completing a model IRS form (either Form 5305-SIMPLE or 5304 SIMPLE) and can make contributions directly to employees’ IRAs.
However, the rules governing SIMPLE IRA plans are confusing. How so? In some cases they are treated like IRAs, and in other cases they are treated like workplace plans. Also, SIMPLE IRAs and SEP IRAs differ in certain respects.

One area where SIMPLE IRA plans are about to get less “SIMPLE” is the contribution limits. SIMPLE plans allow for both elective deferrals and employer contributions. The employer contribution can be a matching contribution for employees who make salary deferrals. The match is a dollar-for-dollar match on deferrals, taking into consideration deferrals up to 3% of pay. Or, the employer contribution can be an across-the-board contribution for all eligible employees equal to 2% of pay.

The elective deferral limits have traditionally been a maximum amount for employees under age 50 and an additional “catch-up” amount for those age 50 or older.  For 2023, the under-50 dollar limit was $15,500 and the catch-up limit was $3,500. Both of those limits are adjusted periodically to reflect cost-of-living increases. The IRS has announced that for 2024 the under-50 limit will go up to $16,000, while the catch-up will remain at $3,500.

Easy enough, but Congress just had to complicate things in the SECURE 2.0 Act of 2022. Starting in 2024, both the under-50 limit and the catch-up limit will increase by 10% above the $16,000/$3,500 limits – but only for businesses with 25 or fewer employees. So, for those very small companies, the 2024 under-50 limit is actually $17,600 ($16,000 x 10%), and the catch-up limit is $3,850 ($3,500 x 10%). And it gets worse.  Businesses with 26-100 employees can elect the extra 10%, but only if they provide a 4% (instead of 3%) matching contribution or a 3% (instead of 2%) across-the-board contribution.

Unfortunately, it gets even worse. Also beginning in 2024, SIMPLE IRA employers can make an additional employer across-the-board contribution to all employees who have at least $5,000 of pay for the year. This additional contribution can be up to 10% of pay, but no more than $5,000. It is available even for companies that make their “regular” employer contribution as a match.

These increased limits may be welcome news for SIMPLE IRA participants looking to increase their savings. But SIMPLE? Hardly.

By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC

To read more of our blog articles, click here.

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2023, Ed Slott and Company, LLC Reprinted from The Slott Report, 12/06/23, with permission. https://www.irahelp.com/slottreport/congress-makes-simple-ira-plans-less-simple, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.