If an employer has a Simple IRA plan in which monthly contributions are being made and several employees are making withdrawals as soon as the funds are going in, would the employer still have to match the salary deferral amount? I guess I am asking if you would deduct the amount of the withdrawal before depositing the match. Its crazy for the employees to be taking the penalty/tax hits but these are lower income employees who really dont care.

Yes. The matching contribution must still be made, as the matching is based on amounts deferred and compensation.

It is unfortunate, but it is those who will need the retirement fund the most, that find it most challenging to save for retirement. Maybe the employer could consider providing an explanation of the importance of saving for retirement, and include some financial projections on the effects of withdrawing the contributions this soon? They should consider also that if it has been less than 2 years since the first deposit was made to a SIMPLE IRA, and the individual is under age 59 ½ when the distribution occurs, the penalty could be up to 25%.