1. (a)

   1. (1) Beginning in tax years after 1996, eligible employers may maintain SIMPLE retirement plans to provide a tax-favored means of providing for employees' retirement.

   2. (2) An eligible employer is an employer that:

      1. (A) Employs no more than one hundred (100) employees who each received at least five thousand dollars ($5,000) of compensation from the employer the preceding year; and
      2. (B) Does not maintain another employer-sponsored retirement plan to which contributions were made or benefits accrued.
2. (b) An eligible employer that establishes and maintains a SIMPLE plan for at least one (1) year, but thereafter fails to qualify, continues to be treated as an eligible employer for the two (2) years following the last year in which it did qualify.

3. (c)

   1. (1) An employee is eligible to participate in any calendar year if he or she:

      1. (A) Received at least five thousand dollars ($5,000) of compensation from the employer during each of the two (2) preceding calendar years; and
      2. (B) Is reasonably expected to receive at least five thousand dollars ($5,000) in compensation during the current calendar year.
   2. (2) A self-employed individual is treated as an employee and may participate in a SIMPLE plan if the compensation threshold is met.

4. (d) There are two (2) types of SIMPLE plans:

   1. (1) Cash or deferred arrangement (CODA) incorporated in a qualified plan (I.R.C. § 401(k)(11)(c)); or
   2. (2) An IRA established for each participating employee.

5. (e)

   1. (1) A SIMPLE plan must permit each eligible employee to elect to have the employer make payments either:

      1. (A) Directly to the employee in cash; or
      2. (B) As a contribution to the SIMPLE account.
   2. (2) No contribution, other than elective contributions, employer matching contributions, and nonelective employer contributions may be made to a SIMPLE account.
   3. (3) However, a rollover from another SIMPLE account may be received.

6. (f)

   1. (1) Elective contributions are limited to six thousand dollars ($6,000) for any calendar year.
   2. (2) The employer must match the elective contribution of an employee in an amount not exceeding three percent (3%) of the employee's compensation.

   3. (3)

      1. (A) However, the employer may elect to limit its match, for all eligible employees, to a smaller percentage of compensation not less than one percent (1%).
      2. (B) The election may not be made in more than two (2) out of every five (5) years.

7. (g)

   1. (1) Nonelective contributions may be made as an alternative to matching contributions.

   2. (2) The employer may elect to make nonelective contributions of two percent (2%) of compensation for each employee who:

      1. (A) Is eligible to participate; and
      2. (B) Has at least five thousand dollars ($5,000) of compensation from the employer for the calendar year.

   3. (3)

      1. (A) The compensation that may be taken into account in determining the two percent (2%) nonelective contribution may not exceed an indexed dollar amount.
      2. (B) For 1996, this amount is one hundred fifty thousand dollars ($150,000) for most plans.

8. (h)

   1. (1) Elective contributions of employees are not includable in gross income when made.

   2. (2)

      1. (A) They are taxed only under the distribution rules that govern distributions from conventional IRAs.
      2. (B) I.R.C. § 408(p)(1)(A).

   3. (3)

      1. (A) Any elective contributions under this plan are included in the sum of elective deferrals, subject to an annual limit on the amount that can be excluded from income.
      2. (B) I.R.C. § 402(g)(3)(D).

9. (i)

   1. (1) The employer is entitled to a deduction for its contributions to a SIMPLE account.
   2. (2) For deduction purposes, the employer contributions to a SIMPLE account are treated as if they were made to a plan subject to the requirements of I.R.C. § 404(m).

10. (j)

    1. (1) For self-employed persons, the contribution is not a business expense, therefore it is not deductible on the Schedule C.
    2. (2) In the case of a sole proprietorship, the contribution may only be claimed as an adjustment to income. Example: XYZ Company maintains a SIMPLE retirement plan for its eligible employees. Melinda Jones earns thirty thousand dollars ($30,000) from XYZ Company. The company matches the elective contribution in the amount of three percent (3%) of the employee's compensation. Ms. Jones elects to contribute six thousand dollars ($6,000) to her SIMPLE account. Ms. Jones has no other income deferrals. XYZ Company makes a matching contribution of seven hundred twenty dollars ($720) to Ms. Jones' SIMPLE account (($30,000 - $6,000) x 3%). Ms. Jones' wages reported on her W-2 are twenty-four thousand dollars ($24,000), and XYZ Company may deduct the seven hundred twenty dollars ($720) as an expense.

Codification Notes: “IRA” means individual retirement account. "SIMPLE" means Savings Incentive Match Plan for Employees. I.R.C. § 408(p)(1)(A) is codified at 26 U.S.C. § 408(p)(1)(A). I.R.C. § 402(g)(3)(D) is codified at 26 U.S.C. § 402(g)(3)(D). I.R.C. § 404(m) is codified at 26 U.S.C. § 404(m).