Save time with our cheat sheets, fact sheets, checklists & books!

March 3, 2009

What definition of compensation is used when making the 3% employer matching contribution or the 2% nonelective contribution to a SIMPLE IRA plan?

Share on print
Print
Share on facebook
Share on twitter
Share on pinterest
Share on linkedin

What definition of compensation is used when making the 3% employer matching contribution or the 2% nonelective contribution to a SIMPLE IRA plan?

Question What definition of compensation should we use when making either the 3% employer matching contribution or the 2% nonelective contribution to our SIMPLE IRA plan?

Answer
When an employer makes either the 3% matching contribution or the 2% nonelective contribution on behalf of a SIMPLE IRA plan participant, it is based on the participant’s wages subject to income tax withholding plus the amount of salary reduction contributions, if any, made by the participant. Wages subject to income tax withholding are defined in Code §3401(a) and this is the amount shown in box 1 of an employee’s Form W-2. Salary deferrals are reported on box 12, Code S. In addition, to permit SIMPLE IRA plans to be established for domestic help, compensation includes amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority, even though such amounts are not wages under §3401(a).

The cap on the amount of compensation that can be considered for contribution purposes ($230,000 for 2008), which applies to most employer retirement plans, applies only to the 2% nonelective contribution.

In the case of a self-employed individual participating in a SIMPLE IRA plan, the 3% matching contribution or the 2% nonelective contribution is based on net earnings from self-employment determined under §1402(a) (Form 1040, Schedule SE, Section A, line 4 or Section B, line 6) prior to subtracting any contributions made under the SIMPLE IRA plan on the individual’s behalf. Compensation for a self-employed individual also includes amounts paid for services performed by members of certain religious faiths that have received exemptions from the self-employment tax

*******This Q&A was taken from the IRS’s Summer 2008 Employee Plan Newsletter ******

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Share on print
More

Keep Learning

Saver’s Credit

Definition Also known as the Saver’s Tax Credit: Nonrefundable tax credit available to eligible individuals who make contributions to their retirement account. The saver’s credit

SIMPLE 401(k) Plan

Definition A SIMPLE 401(k) plan is a 401(k) plan  established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions

Individual Retirement Arrangement (IRA)

Definition Individual retirement arrangement (IRA) is an umbrella term that covers individual retirement account and individual retirement annuity. These are retirement savings vehicles established by

Be among the first to know when

IRA Rules
Change