By Denise Appleby

Who May Establish a SIMPLE IRA?
Any employer who meets the following requirements is eligible to establish a SIMPLE IRA plan:

  • The employer employed 100 or fewer employees who earned at least $5,000 during the preceding year. All employees employed at any time during the calendar year are counted regardless of whether they are eligible to participate in the SIMPLE IRA plan.
  • The employer maintains no other plans (not including plans for employees whose benefits are determined under a collective bargaining agreement (unionized employees) ). Other plans include:
An employer must not exceed the 100-employee limit each year that the SIMPLE IRA is maintained. An employer who fails to continue meeting the 100-employee limit may maintain the SIMPLE IRA for two years after the first year the 100-employee limit is exceeded. After this period, if still exceeding the 100-employee limit, the employer is no longer eligible to maintain a SIMPLE IRA plan.

Who May Participate in a SIMPLE IRA?
Any employee who has received at least $5,000 in compensation during any two years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate in a company's SIMPLE IRA.

Example: IRA Participation Rules

ABC Corporation established a SIMPLE IRA for tax year 2013. To participate in ABC\'s SIMPLE IRA, an employee must have received at least $5,000 in compensation during any two years preceding 2013; the employee must also be reasonably expected to receive at least $5,000 for 2013.
Tom has been working with ABC for the past five years, and he earned annual compensation in the following amounts:
2008- $3,000
2009- $4,000
2010- $5,000
2011- $4,000
2012- $5,000
Tom was promoted to supervisor in 2013 and received a salary increase. Based on this salary increase, Tom is expected to earn $6,000 for the 2013 plan year.
Tom is eligible to participate in the SIMPLE IRA because he earned at least $5,000 for at least two years preceding the current calendar year (2012 and 2010) and is reasonably expected to earn at least $5,000 in the current year.
Although an employer is not allowed to impose eligibility requirements that are more restrictive than the ones stated above, an employer may impose eligibility requirements that are less restrictive than the ones stated above.

Example: SIMPLE Plan Eligibility Requirements
The facts are the same as in the example above except that in June 2013, Tom suffered an injury and was forced to cut back on the number of hours he worked. As a result, Tom\'s compensation for 2013 totaled $3,000.
Although Tom did not earn $5,000 for 2013 (the current calendar year), he is still eligible to participate in the plan because at the beginning of the plan year, he was reasonably expected to earn at least $5,000.

Employees Who May Be Excluded
The employer may exclude the following categories of employees from participating in the SIMPLE IRA plan:

  • Employees whose benefits are provided in accordance with a collective bargaining agreement (union agreement)
  • Nonresident alien employees who received no U.S. source wages, salaries or other personal services compensation from the employer
The Deadline for Establishing a SIMPLE IRA

For the Employer
A new SIMPLE IRA plan must be established between January 1 and October 1 of the year for which the plan is being established. An exception applies to an employer whose business is established after October 1. Such an employer is allowed to establish a SIMPLE IRA plan as soon as administratively feasible.

For the Employee
An eligible employee's SIMPLE IRA must be established in time to receive the first contribution being made on the employee's behalf.

The Documentation Requirements for Establishing a SIMPLE IRA

For Employers
An employer establishes a SIMPLE IRA by properly completing all the sections of IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE.

An employer who wants to allow each participant to choose the financial institution with which to establish his or her SIMPLE IRA should use the Form 5304-SIMPLE. The employer is then required to send contributions on directly to that financial institution on the employee's behalf.

An employer who wants to make contributions for all employees at the same financial institution should use the Form 5305-SIMPLE. All contributions for all employees will be made to SIMPLE IRAs at the same designated financial institution (DFI); however, employees may establish SIMPLE IRAs with other financial institutions to which their SIMPLE IRA balances may be transferred. SIMPLE IRA contributions may not be made directly to the SIMPLE IRA established at another financial institution.

Employers should consult with their financial institution regarding the proper SIMPLE IRA paperwork, as not all financial institutions use the same version of the SIMPLE form.

For Employees
Each eligible employee must complete a SIMPLE IRA adoption agreement to establish their individual accounts.

Notification Requirements for Establishing a SIMPLE IRA
The election period is the period during which an employee may elect to participate in the SIMPLE IRA. The election period starts usually at least 60 days before the first day the employee would be eligible to participate in the plan. An employer who adopts a SIMPLE IRA plan must notify each employee of the following information before the beginning of the election period

  • The employee's opportunity to make or change a salary-reduction choice under a SIMPLE IRA plan
  • The employer's choice to make either matching contributions or nonelective contributions
  • A summary description** (Generally, this is provided to the employer by the SIMPLE IRA trustee/custodian.)
  • Written notice if the employer established the SIMPLE plan with a designated financial institution. In this case, the employee may transfer his or her SIMPLE IRA contributions to another account without cost or penalty
**The summary description must be provided to employees at least 60 days before the employee is eligible to participate in the plan and to each employee each year that the employer maintains the SIMPLE IRA plan. The summary description must include the following information:

  • The name and address of the employer and the trustee/custodian
  • The requirements for eligibility for participation
  • The benefits provided with respect to the arrangement
  • The time and method of making employee elections with respect to the arrangement; this information indicates when and how an employee may elect to defer contributions or change their deferral-contribution elections.
  • The procedures for and effects of withdrawals (including rollovers) from the arrangement
Eligible Compensation
For common-law employees, compensation is based on W-2 wages. Compensation for sole proprietors is based on Schedule C income, while for partners in a partnership, it is based on Schedule K-1 income. An employee's compensation in excess of $255,000 may not be considered for the purposes of making a SIMPLE IRA nonelective contribution.

Next: SIMPLE IRAs: Contributions »

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