Here is the details of a "Simple IRA"
http://www.irs.gov/publications/p560/ch03.html#en_US_2012_publink10008872
Contribution Limits
Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching contributions or nonelective contributions, defined later. No other contributions can be made to the SIMPLE IRA plan. These contributions, which you can deduct, must be made timely. See Time limits for contributing funds, later.
Salary reduction contributions.
The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $11,500 for 2012 ($12,000 for 2013). These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $11,500 ($12,000 for 2013) limit.
If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,000 for 2012 and $17,500 for 2013) on exclusion of salary reduction contributions and other elective deferrals.
Catch-up contributions.
A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for 2012 and 2013 for SIMPLE IRA plans is $2,500. Salary reduction contributions are not treated as catch-up contributions for 2012 until they exceed $11,500 ($12,000 for 2013). However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.
The catch-up contribution limit.
The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.
Employer matching contributions.
You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. This requirement does not apply if you make nonelective contributions as discussed later.
Example.
In 2012, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make 3% matching contributions. The total contribution you make for John is $2,000, figured as follows.
Salary reduction contributions
($25,000 × .05) $1,250
Employer matching contribution
($25,000 × .03) 750
Total contributions $2,000
The total contribution you make for yourself is $5,200, figured as follows.
Salary reduction contributions
($40,000 × .10) $4,000
Employer matching contribution
($40,000 × .03) 1,200
Total contributions $5,200
Lower percentage.
If you choose a matching contribution less than 3%, the percentage must be at least 1%. You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective.
Nonelective contributions.
Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Only $250,000 of the employee's compensation can be taken into account to figure the contribution limit in 2012 ($255,000 in 2013).
If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year.
Example 1.
In 2012, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective contribution. Both of you are under age 50. The total contribution you make for Jane is $4,320, figured as follows.
Salary reduction contributions
($36,000 × .10) $3,600
2% nonelective contributions
($36,000 × .02) 720
Total contributions $4,320
The total contribution you make for yourself is $6,000, figured as follows.
Salary reduction contributions
($50,000 × .10) $5,000
2% nonelective contributions
($50,000 × .02) 1,000
Total contributions $6,000
Example 2.
Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,000, figured as follows.
Salary reduction contributions
(maximum amount allowed) $11,500
2% nonelective contributions
($75,000 × .02) 1,500
Total contributions $13,000
Time limits for contributing funds.
You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions.
