Which provision is characteristic of a SIMPLE IRA?

A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Arrangement) is designed primarily for small businesses to encourage retirement savings among employees. One of its distinctive characteristics is the provision allowing employers to make a 2% nonelective contribution on behalf of each eligible employee. This means that regardless of whether the employee contributes to their account, the employer will contribute a flat percentage of the employee's compensation to their SIMPLE IRA. This contribution helps employees build their retirement savings more effectively.

The 3% matching contribution mentioned in another option applies to the alternative matching provision that an employer can adopt, but the nonelective contribution is a foundational feature of the SIMPLE IRA plan, making it more accessible for employers who prefer a straightforward contribution method.

Understanding the nature of contributions is crucial for appreciating how SIMPLE IRAs encourage participation from both employees and employers. This foundational characteristic supports the plan's goal of increasing retirement saving rates among employees in small businesses.