The Employee Retirement Income Security Act (ERISA) covers most employer-sponsored retirement plans, including SIMPLE Individual Retirement Accounts (SIMPLE IRAs). SIMPLE IRAs were designed to make it easier for companies with fewer than 100 employees to set up a tax-advantaged retirement plan for their employees.
Here’s a look at how the ERISA rules apply to SIMPLE IRAs.
- Simple IRAs are subject to the ERISA rules, which cover most employer-sponsored retirement plans.
- ERISA dictates how a plan is structured and administered.
- The requirements for SIMPLE IRAs include identifying who is eligible to participate, when and how contributions are handled.
ERISA requirements for SIMPLE IRA
SIMPLE is an acronym for Savings Incentive Match Plans for Employees. SIMPLE IRAs don’t have the administrative and reporting burdens that qualified retirement plans (like 401(k)s) do, and they’re easier to set up.
ERISA, enacted in 1974, specifies the requirements for the structuring and administration of employer pension plans. For SIMPLE IRAs, ERISA determines which employees are eligible and how a company handles employee contributions.
Employers must clearly detail the plan’s features in a summary description of the plan. This document contains an explanation of employee rights and employer responsibilities.
ERISA allows employers some flexibility to adjust eligibility requirements, but in general, all employees over the age of 21 who have served at least one year must be eligible for the plan. Some employers may allow employees to become eligible earlier, sometimes even immediately.
Employee Contribution Rules
ERISA also defines key issues regarding the management of employee contributions. Salary deferred contributions for a SIMPLE IRA, for example, must be deposited into the participant’s account by the end of the month following the month in which the funds were withheld from the participant’s paycheck.
Simple IRAs are subject to contribution limits. For 2022, employees can contribute up to $14,000 (rising to $15,500 in 2023). Those age 50 and older can contribute an additional $3,000 in 2022 ($3,500 in 2023), known as the catch-up contribution.
The employer can pay this amount dollar for dollar, up to 3% of the employee’s wages. Or, alternatively, an employer can contribute 2% of each employee’s wages without requiring employee contributions. This is known as a non-elective contribution.
Contribution limits are higher for a SIMPLE IRA than for a traditional or Roth IRA, but lower than the limits for a 401(k). For 2022, the annual contribution limit for traditional and Roth IRAs is $6,000 (increasing to $6,500 for 2023) with a $1,000 recovery contribution allowed for those over 50. For 2022, employees can contribute up to $20,000 to a 401(k) (rising to $22,500 in 2023), with a recovery contribution of $6,500 (rising to $7,500 in 2023).
Investment choices for SIMPLE IRA
Because these accounts are IRAs, participating employees are in full control of investment choices for their SIMPLE IRA. This differs from 401(k) plans where the employer typically offers a limited number of pre-selected funds for employees to choose from.
With a SIMPLE IRA, the employer chooses and files the plan using IRS forms 5304-SIMPLE or 5305-SIMPLE. The employer can designate a particular financial institution to hold all participants’ accounts or allow participants to maintain their SIMPLE IRA at the financial institution of their choice.