SIMPLE IRA match percentages

[Guest SPollock]

My understanding is that the employer's required match on a SIMPLE IRA plan must be dollar-for-dollar on the 1st 3%, but can be reduced to no less than 1% in any two out of five years. If this is correct, I have two questions. 1) Can the employer use the 1% match in the first year? 2) What happens, if anything, if the employer uses the 1% for the first two years then terminates the plan?

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[Kathy]

According to the information on the Form 5305-SIMPLE, you can treat the years before you first established the SIMPLE as years for which you made the 3% contribution -so, yes, you can make a 1% contribution for the first two years of a SIMPLE Plan. However, I seem to remember another rule regarding retirement plans - that the employer "intend" to maintain a retirement plan. I think you could make the point that an employer who sets up a SIMPLE with a 1% match for 2 years and then terminates it never really intended to have a qualified retirement plan in the first place - instead, was just looking for a quick and easy tax shelter. I think the IRS would frown on that.

[Gary Lesser]

No problem. Contributions are optional even if 1% was contributed for just two years and the plan was terminated (and employees so notified of the amendment, and given a copy of same).