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Simple IRA Contributions - What Every Small Business Owner Needs to Know

As a small business owner, offering a Simple IRA retirement plan can help attract and retain valuable employees. But it's critical you understand the contribution rules to remain compliant and avoid potential penalties. Here are the key points:

Employee Eligibility

You can establish a Simple IRA if you had 100 or fewer employees who earned $5,000 or more from your business in the preceding calendar year. Employees who earned at least $5,000 in any two prior years and are expected to earn $5,000 in the current year are eligible to participate.

Employee Deferral Limits

For 2023, each eligible employee can defer up to $15,500 of their compensation into a Simple IRA through payroll deductions ($19,000 if they are age 50 or older with the $3,500 catch-up contribution).

Required Employer Contributions

As the employer, you must make contributions to your employees' Simple IRAs in one of two ways:

  1. A matching contribution up to 3% of each eligible employee's compensation for the year.

  2. A non-elective contribution of 2% of compensation for all eligible employees for the year, regardless of whether they contribute themselves.

Contribution Deadlines

Employee salary deferrals must be deposited into the Simple IRAs as soon as possible after being withheld from their pay. Your employer contributions are required to be deposited by your business's tax return due date, including any extensions.

Reporting Contributions on Tax Forms

Employee deferrals will be reported in Box 9 "SIMPLE contributions" on Form 5498 from your Simple IRA provider. Your employer contributions go in Box 13a "Postponed contributions" if made timely or Box 13b "Late contributions" if deposited late.

Excess Deferral Penalties

If any employee exceeds the annual deferral limit, their excess amount plus attributable earnings must be distributed by April 15 (or your extended tax return due date) to avoid a 6% excise tax. This tax applies annually on any excess that remains.

Tax Reporting for Excesses

Excess employee deferrals must be reported on your employees' Form 1040, line 25b each year. They must also file Form 5329 showing the excess amount and calculate any 6% excise tax owed.

By understanding and adhering to these Simple IRA contribution rules and deadlines, you can ensure your retirement plan maintains compliance and avoid penalties from the IRS. Work closely with your plan administrator and tax professional if you have any other questions.

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