Questions and Answers

IRC Section 408(p)(2)(A)(iii) requires an employer to match eligible employees' salary deferral contributions. This contribution is a dollar of matching contribution for each dollar of an employee's salary deferral, with no matching contribution for salary deferrals that exceed 3 percent of an eligible employee's compensation.

There is no limit on the compensation amount used to calculate an employer's matching contribution, and compensation for this determination is for the entire calendar year, not just an employee's months of participation.

Rather than making a matching contribution, under IRC Section 408(p)(2)(B), an employer can elect to make a nonelective contribution of 2 percent of compensation. An employer makes this nonelective contribution on behalf of all eligible employees, even those that do not elect salary deferral contributions for the year.

An employer may elect to limit its matching contribution to salary deferrals of less than 3 percent of compensation—but never below 1 percent and never for more than two years out of a five-year period that ends with the current year. For meeting this five-year test, IRC Sections 408(p)(2)(B)(i) and 408(p)(2)(C)(ii)(III) treat each year an employer chooses to make a nonelective contribution and each year a SIMPLE IRA plan was not in effect as if the employer had made a matching contribution on salary deferrals up to 3 percent of compensation that year.