I accompanied another employee on a presentation to a sole proprietorship. The proprietor asked about employer contributions, specifically, can she contribute more than 3% and must she contribute 3% for an employee if the employee only contributes 1%?

As you are aware the standard text says the employer is required to match employee contributions dollar for dollar up to 3%. To her, this implies that if the employee contributes less than 3% she only has to match the employee's contribution, not provide 3%. Additionally, she inferred she could contribute more than 3% if she wants to.

I'm not sure if the above was a question or a statement, but if it was a question, here's the answer. The employer elects annually in the notice to employees on Form 5304, Form 5305, or a similar form, whether they will make a 3% match, a lesser match or a 2% nonelective contribution. Let's say the employer elects the 3% match. Then, if an employee contributes 1% to a SIMPLE IRA, the employee would get a 1% match, not 3%. If the employee contributes 3%, he would get 3%. If the employee contributes 4%, he would still get only 3%.

Thank you for your reply, but it only aaddressed half the question. Can the proprietor contribute more than 3% if the business has a particularly good year or is the maximum contribution she is allowed to make by law limited to 3%?

In a SIMPLE IRA, $7,000 in salary reduction contributions (for 2002) and the 3% match is the maximum that can be contributed. If the employer wants to make additional discretionary contributions, consider having a profit-sharing plan with 401(k) instead.