Can an employer contribute to a traditional ira

A SIMPLE IRA is an excellent tool for small business owners to help their employees save up for retirement. This type of retirement account combines features of both the traditional IRA and the 401(k). Like both of these plans, the SIMPLE IRA is subject to annual contribution limits. In 2022, employees can contribute up to $14,000 to a SIMPLE IRA account. For 2023, this figure is increasing to $15,500.

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SIMPLE IRA Basics

SIMPLE IRA is an acronym for savings incentive match plan for employees individual retirement accounts. A SIMPLE IRA is a type of traditional IRA that is designed for small businesses with 100 or fewer employees. To be eligible for a SIMPLE IRA, an employee must have received at least $5,000 in compensation in the previous two calendar years and expect to receive at least that much in the present calendar year.

As an employee with a SIMPLE IRA, you can contribute pre-tax dollars to your plan through “elective deferrals,” either in cash or as a salary reduction contribution. The latter can be a specified dollar amount or a percentage of your salary. While the IRS does not require employees to contribute, it prohibits employees from opting out of receiving non-elective contributions from their employers.

The IRS requires that your employer makes a contribution on your behalf. This can be either a dollar-for-dollar match of up to 3% of your salary or a flat 2% of pay. Employers must contribute regardless of whether the employee elects to.

An employers’ matching contributions are tax deductible as a business expense. Compared to many other workplace retirement plans, SIMPLE IRAs are cheaper for employers to set up and easy to administer.

What Are the SIMPLE IRA Contribution Limits?

SIMPLE IRAs have higher contribution limits than both traditional and Roth IRAs. As with other plans, the IRS limits contributions to a SIMPLE IRA. Those limits are subject to change year to year. Check out the SIMPLE IRA contribution limits for 2022 below.

Employee SIMPLE IRA Contribution Limits for 2022 and 2023

An employee cannot contribute more than $14,000 in 2022 or $15,5000 in 2023. Employees age 50 or over can contribute an extra $3,000 as a catch-up contribution in 2022, or up to $3,500 in 2023. If you participate in any other employer plan during the year, the total cumulative amount of elective deferrals you can contribute to all plans is $20,500 in 2022 and $22,500 and 2023.

Employer SIMPLE IRA Contribution Limits for 2022 and 2023

Employer contributions can be a match of the amount the employee contributes, up to 3% of the employee’s salary. An employer may choose to lower the matching limit to below 3%. However, an employer cannot lower the threshold below 1%, and she cannot keep the lowered limit in place for more than two out of five years. Your employer must give you reasonable notice ahead of the 60-day election period if she intends to change a match amount.

Another option is for the employer to make non-elective contributions of 2% of the employee’s salary. This means that the employer is required to contribute regardless of what the employee does. The IRS takes into account an employee’s salary for 2022 of up to $305,000, meaning there is effectively an employer contribution limit of $6,100. For 2023, these figures raise to $330,000 and $6,600, respectively.

Why Are There IRA Contribution Limits?

You may be wondering why there are contribution limits in the first place. Because IRAs are tax-advantaged accounts, contribution limits were introduced to prevent the very wealthy from benefiting more than the average American. By instituting contribution limits, the IRS intends to ensure that the tax benefits serve as incentives for the average worker, not as a tax shelter for the wealthy.

What Are the Contribution Deadlines for a SIMPLE IRA?

For new SIMPLE IRA accounts to be effective for that tax year, you must establish the account by Oct. 1. Employers are required to deposit employees’ elective-deferral contributions within 30 days of the end of the month that they were withheld. They must make matching or non-elective contributions by the tax return filing deadline (including extensions) to receive their deduction.

Bottom Line

A SIMPLE IRA is a retirement savings account option worth considering if you’re the owner or employee of a small business. The IRS requires employers to make a contribution on their employee’s behalf, and employees may elect to make contributions.

*The employer can contribute up to 25% of your compensation up to the maximum limit. Employer contributions may not exceed $66,000 for 2023, raised from $61,000 in 2022. Compensation limits and deductibility apply. Please contact your employer for further information.

SIMPLE IRA Contribution Limits

 20232022For Tax Year 2022Employer Contribution Limits*Up to 3% of Compensation
($15,500 Maximum)*Up to 3% of Compensation
($14,000 Maximum)*Employee Contribution Limit$15,500$14,000Employee Catch-Up Contribution
(Age 50 or Older)$3,500$3,000

Employer contributions are in addition to your elective deferrals. *Employers can choose from one of three contribution options: 1) Match employee deferrals dollar-for-dollar, up to three percent of the employee’s compensation (compensation includes employee deferrals); 2) Two percent nonelective contribution to all eligible employees (even to those employees who decided not to defer) *; or 3) Elect to match a lower percentage (but not lower than one percent). This option is allowed for only two years of any five-year period***

**The two percent nonelective contribution is based on two percent of the eligible employee’s compensation, up to the compensation cap. For 2023, the compensation cap is $330,000, raised from the compensation cap of $305,000 in 2022. ***The five-year period includes the current year and the prior four years. If during the five-year period there are years where the SIMPLE IRA plan was not yet established or the employer made nonelective contributions to the plan, the employer is considered as having satisfied the three percent matching contribution requirement for those specific years.

Individual 401(k) Plan Contribution Limits

 20232022For Tax Year 2022Employer Contribution Limits$66,000*$61,000*Employee Elective Deferrals$22,500$20,500Employee Catch-Up Deferral
(Age 50 or Older)$7,500$6,500

*The employer can contribute up to 25% of your compensation up to the maximum limit. Employer contributions and employee elective deferrals in aggregate may not exceed $66,000 for 2023 ($73,500 for ages 50+), raised from $61,000 in 2022 ($67,500 for ages 50+). Compensation limits and deductibility apply. Please contact your employer for further information.

We do not offer investment, tax, financial, or legal advice to clients. Individuals who believe they need advice should consult with qualified professional(s) licensed in that area. This section of our website is devoted to providing clients and potential clients with educational information. It is in no way intended as tax advice.

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