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

8.18 SIMPLE IRA Contributions and Distributions

The only contributions that may be made to a SIMPLE IRA are elective salary-reduction contributions by employees and matching or non-elective contributions by employers. All contributions are fully vested and nonforfeitable when made.

Regardless of compensation, eligible employees (8.17) may elect each year to make salary-reduction contributions to the plan up to the annual SIMPLE IRA limit (8.17). Salary-reduction contributions are excluded from the employee’s taxable pay on Form W-2 and not subject to federal tax withholding. They are subject to FICA withholding for Social Security and Medicare tax.

Eligible employees must be given notice by the employer of their right to elect salary-reduction contributions and at least 60 days to make the election. After the first year of eligibility, the election to defer for the upcoming year is made during the last 60 days (at minimum) of the prior calendar year. If the employer uses model IRS Form 5304-SIMPLE or 5305-SIMPLE, a notification document is included.

If an employee contributes to a SIMPLE IRA and also to a 401(k) plan, 403(b) or salary-reduction SEP of another employer for the same year, the salary-reduction contributions to the SIMPLE IRA count toward the overall annual limit on tax-free salary-reduction deferrals (7.17). Deferrals over the annual limit are taxable and must be removed to avoid being taxed again when distributed from the plan (7.18).

Employer contributions.

Each ...