What types of contributions are part of a SIMPLE plan?

A SIMPLE (Savings Incentive Match Plan for Employees) plan is designed to help small businesses provide their employees with a retirement savings option. The correct answer, which highlights employee salary reductions and employer contributions, reflects the fundamental structure of a SIMPLE plan.

Under this plan, eligible employees can voluntarily reduce their salary to make contributions to their retirement savings. Additionally, employers are required to make matching contributions up to a certain percentage of the employee's salary or a fixed contribution, depending on the preference established within the plan. This combination of employee salary reductions and employer contributions is what sets SIMPLE plans apart from other types of retirement accounts, making them accessible and beneficial for both employees and employers.

The focus on both employee contributions and employer matching is significant in promoting retirement savings and ensuring that employees have a direct stake in their future financial security. This structure encourages participation and helps individuals to build their retirement funds effectively over time.