The term SIMPLE IRA stands for Savings Incentive Match Plan for Employees. A SIMPLE IRA is a type of employer provided retirement plan. Specifically, it is a type of Individual Retirement Account that is set up to be an employer provided plan. It is similar to more well know plans such as the 401(k) and 403(b) (also known as TSA plans), but offers simpler and less costly administration rules. This allows SIMPLE IRA's to be affordable for small businesses or sole proprietors that would otherwise not be able to afford a 401(k). The tradeoff is that the contribution limit for SIMPLE plans is lower than for most other types of employer provided retirement plans, $10,000 for 2005 and 2006 as compared to $14,000 in 2005 and $15,000 in 2006 for a 401(k). For a non-profit employer, there is no advantage in establishing a simple plan over a 403(b) since the 403(b) has similar administration expense.

Technicalities

• The plan requires a certain minimum match from the employer for money the employee contributes. Typically it is dollar for dollar on the first 3% of income that the employee defers. In 2 out of 5 years the match can be as low as 1%.
  
• A catch up provision is available for participants over the age of 50. The extra catch up contribution allowed is $2,000 for 2005, as compared to $4,000 catch up available in a 401(k), 403(b), and 457 plans.
  
• The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the increased additional expense to administrate the 401(k).