Retirement Plans FAQs regarding SIMPLE IRA Plans – General Questions
What is a SIMPLE IRA plan?
A SIMPLE IRA plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis. See IRS Publication 560, IRS Publication 590 and IRS Notice 98-4 for detailed information on SIMPLE IRA plans.
Can any employer establish a SIMPLE IRA plan?
SIMPLE IRA plans may be established only by employers that had no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year (the “100-employee limitation”). For purposes of the 100-employee limitation, all employees employed at any time during the calendar year are taken into account, regardless of whether they are eligible to participate in the SIMPLE IRA plan. Thus, employees who are excludable under the rules of Internal Revenue Code section 410(b)(3) or who have not met the plan’s minimum eligibility requirements must be taken into account. Employees also include self-employed individuals described in section 401(c)(1) who received earned income from the employer during the year.
Are tax-exempt employers and governmental entities permitted to maintain SIMPLE IRA plans?
Yes. Excludable contributions may be made to the SIMPLE IRA of employees of tax-exempt employers and governmental entities on the same basis as contributions made to employees of other eligible employers.
How is a SIMPLE IRA plan established?
A SIMPLE IRA plan is established by adopting a SIMPLE IRA plan document and setting up SIMPLE IRAs for the eligible employees. There are three basic steps in setting up a SIMPLE IRA plan, all of which must be satisfied.
A SIMPLE IRA plan may be established by adopting an IRS model SIMPLE IRA plan using either Form 5305-SIMPLE (if all contributions are required to be deposited initially at a designated financial institution) or Form 5304-SIMPLE (if each employee is permitted to choose the financial institution for receiving contributions). A prototype SIMPLE IRA plan that has been approved by the IRS may also be used. Approved prototype SIMPLE IRA plans are offered by banks, insurance companies, and other qualified financial institutions. Each eligible employee must be provided with certain information about the SIMPLE IRA plan and the SIMPLE IRA where contributions for that employee will be deposited. The information must be provided each year prior to the employees’ election period. Generally, the election period is 60 days prior to January 1 of a calendar year. A SIMPLE IRA must be set up for each eligible employee. Either IRS model Form 5305-S (a trust account) or Form 5305-SA (a custodial account) may be used. SIMPLE IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SIMPLE IRA is owned and controlled by the employee and the SIMPLE IRA plan contributions are sent to the financial institution where the SIMPLE IRA is maintained.
See IRS Publication 560, the Instructions to Form 5305-SIMPLE and Form 5304-SIMPLE, and IRS Notice 98-4 for information on establishing a SIMPLE IRA plan.
Is there a deadline to set up a SIMPLE IRA plan?
A SIMPLE IRA plan can be set up effective on any date between January 1 and October 1, provided the plan sponsor did not previously maintain a SIMPLE IRA plan. If a SIMPLE IRA plan was previously established, a SIMPLE IRA plan may be set up effective only on January 1.
Can a SIMPLE IRA plan be maintained on a fiscal-year basis?
A SIMPLE IRA plan may only be maintained on a calendar-year basis.
Is there a grace period that can be used by an employer that ceases to satisfy the 100-employee limitation?
An employer that previously maintained a SIMPLE IRA plan is treated as satisfying the 100-employee limitation for the 2 calendar years immediately following the calendar year for which it last satisfied the 100-employee limitation. However, if the failure to satisfy the 100-employee limitation is due to an acquisition, disposition or similar transaction involving the employer, then the 2-year grace period will apply only in accordance with rules similar to the rules of section 410(b)(6)(C)(i).
Can an employer make contributions under a SIMPLE IRA plan for a calendar year if it maintains another qualified plan?
Generally, an employer cannot make contributions under a SIMPLE IRA plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA plan) under which any of its employees receives an allocation of contributions in a defined contribution plan or receives an accrual in a defined benefit plan for any plan year beginning or ending within that calendar year. In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures replace otherwise required contributions. “Qualified plan” means a plan, contract, pension or trust described in section 219(g)(5) and includes a plan qualified under section 401(a), a qualified annuity plan described in section 403(a), an annuity contract described in section 403(b), a plan established for employees of a State, a political subdivision or by an agency or instrumentality of any State or political subdivision (other than an eligible deferred compensation plan described in section 457(b)), a simplified employee pension (“SEP”) described in section 408(k), a trust described in section 501(c)(18), and a SIMPLE IRA plan described in section 408(p). This “no-other-plan limitation” applies on a year-by-year basis. Thus, an employer cannot establish a SIMPLE IRA plan for a calendar year if the employer has another plan that is active during any plan year of the other plan that overlaps with the calendar year.
However, an employer can make contributions under a SIMPLE IRA plan for a calendar year even though it maintains another qualified plan if either:
The other qualified plan maintained by the employer covers only employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining and the SIMPLE IRA plan excludes these employees. The other qualified plan is maintained by the employer during the calendar year in which an acquisition, disposition or similar transaction occurs (or the following calendar year); the requirements of this question would have been satisfied if the transaction had not occurred (and thus the employer maintaining the SIMPLE IRA plan had remained a separate employer); and only individuals who would have been employees of that “separate” employer are eligible to participate in the SIMPLE IRA plan.
Must an employer establish a SIMPLE IRA plan on January 1?
An existing employer may establish a SIMPLE IRA plan effective on any date between January 1 and October 1 of a year, provided that the employer (or any predecessor employer) did not previously maintain a SIMPLE IRA plan. This requirement does not apply to a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is established if the employer establishes the SIMPLE IRA plan as soon as administratively feasible after the employer comes into existence. If an employer (or predecessor employer) previously maintained a SIMPLE IRA plan, the employer may establish a SIMPLE IRA plan effective only on January 1 of a year.
When must a SIMPLE IRA be established for an employee?
A SIMPLE IRA is required to be established for an employee prior to the first date by which a contribution is required to be deposited into the employee’s SIMPLE IRA.
What if an eligible employee entitled to a contribution is unwilling or unable to set up a SIMPLE IRA?
If an eligible employee who is entitled to a contribution under a SIMPLE IRA plan is unwilling or unable to set up a SIMPLE IRA with any financial institution prior to the date on which the contribution is required to be made to the SIMPLE IRA of the employee, an employer must execute the necessary documents to establish a SIMPLE IRA on the employee’s behalf with a financial institution selected by the employer.
Are there any “pre-approved” documents an employer may use to establish a SIMPLE IRA plan?
Yes. The Service has issued two model forms: Form 5305-SIMPLE (for use with a Designated Financial Institution (DFI)), which is a form that may be used by an employer establishing a SIMPLE IRA plan with a financial institution that is a DFI; and Form 5304-SIMPLE (not subject to the Designated Financial Institution rules), which is the model form that may be used by an employer to establish a SIMPLE IRA plan that does not use a DFI. Alternatively, an employer can use an approved “prototype” plan, offered by many banks and mutual funds. Prototype plans are plans that are sponsored by financial institutions or firms that specialize in retirement plans and that have been reviewed by the Service to ensure that the language in the documents meets the requirements for SIMPLE IRA plans. Periodically, employers must adopt amended documents, either prototype or model form, to reflect law changes. The financial institution where the SIMPLE IRAs are maintained usually takes care of amending the documents and sending them to employers for adoption. Rev. Proc. 2002-10, 2002-1 C.B. 401, required that all prototype and model SIMPLE IRAs and SIMPLE IRA plans be updated for EGTRRA, generally, by the end of 2002.
How is a SIMPLE IRA plan amended for EGTRRA?
If a prototype plan is used, the plan sponsor should have received an amended plan from the financial institution that provided it. If a new plan document wasn’t received, contact the financial institution. While the financial institution provides many administrative services for plans, it is the plan sponsor’s responsibility to ensure that the plan is kept up-to-date with current law.
IRS – Simple IRA FAQs – Public Domain
http://www.irs.gov/retirement/article/0,,id=111420,00.html