J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

8.17 Who Is Eligible for a SIMPLE IRA?

A SIMPLE IRA is a salary-reduction retirement plan that qualifying small employers may offer their employees. For 2012, the maximum salary-reduction contribution was $11,500, or $14,000 for participants age 50 or older (by the end of 2012) if the plan allowed the additional contributions. See the e-Supplement at jklasser.com for the 2013 limits. Employers are required to make matching contributions or a flat contribution (8.18).

Qualifying employers.

A SIMPLE IRA may be maintained only by an employer that (1) in the previous calendar year had no more than 100 employees who earned compensation of $5,000 or more and (2) does not maintain any other retirement plan (unless the other plan is for collective bargaining employees). A self-employed individual who meets these tests may set up a SIMPLE IRA, as discussed in Chapter 41. A simple IRA must be maintained on a calendar-year basis.

In determining whether the 100-employee test is met for the prior year, all employees under the common control of the employer must be counted. For example, Joe Smith owned two businesses in 2012, a computer rental company with 80 employees and a computer repair company with 60 employees. If they all earned at least $5,000, they all count towards the 100 limit, so if Joe decides in 2013 to set up a retirement plan for his businesses, a different type of plan must be used. He may not establish a SIMPLE IRA for either business under the 100-employee limit.

If a SIMPLE ...