If an employee covered by a SIMPLE leaves his employer within the two-year period, and his new employer doesn't have a SIMPLE, what happens to the plan? Can the employee roll it over without penalty, or keep it at the old company until the two years expire?

SIMPLE IRAs

The appeal of SIMPLE IRAs is that they have minimal paperwork requirements, just an initial plan document and annual disclosures to employees. The employer establishes the plan through a financial institution that administers it. Startup and maintenance costs are low, and employers get a tax deduction for contributions they make for employees. To be eligible to establish a SIMPLE IRA, the employer must have 100 or fewer employees.

To participate in the plan, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude from participation employees who receive benefits through a union.

Key Takeaways

  • A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees.
  • A SIMPLE IRA cannot be rolled over into a traditional IRA without a two-year waiting period from the time the employee first joined a plan, unlike a 401(k).
  • Similarly, SEP IRAs and traditional lRAs may not be rolled over into a SIMPLE IRA.

What Happens to Your SIMPLE IRA After Leaving?

During the first two years after the SIMPLE IRA is established, assets held in the SIMPLE must not be transferred or rolled into another retirement plan. This two-year period, to which you refer in your question, begins the first day the employer deposits a contribution to the SIMPLE. Distributions that happen during the two-year period are subject to an early-distribution penalty of 25% if the SIMPLE IRA owner is under age 59.5 at the time of the distribution.

However, the two-year waiting period does not apply to transfers or rollovers between two SIMPLE IRAs. After the two-year period, the employee may move assets in a SIMPLE to another eligible retirement plan by means of a transfer, a rollover (including a direct rollover) or a Roth conversion.

Therefore, the employee who is no longer with the employer that sponsored the SIMPLE may either leave the assets in the SIMPLE at the current financial institution, or have the assets transferred (or rolled over) to a SIMPLE at another financial institution, until the two-year waiting period is over. Under the SIMPLE requirements, an employer must allow an employee to hold his/her assets at another financial institution.

Establishing a SIMPLE IRA

To establish a SIMPLE IRA for the employee, most financial institutions will require that the SIMPLE IRA owner (the employee) complete his/her SIMPLE IRA adoption agreement, and will also require a copy of Form 5304-SIMPLE or Form 5305-SIMPLE that the employer completed to establish the SIMPLE IRA. Once the new account has been established, the transfer can happen.

Employees must fill out a SIMPLE IRA adoption agreement to open their accounts. Once the plan is established, employers are required to contribute to it each year unless the plan is terminated. However, employers may change their contribution decision between the 2% mandatory contribution and the 3% matching contribution if they follow IRS rules. More information may be found on the IRS SIMPLE IRA information page.

This question was answered by Denise Appleby
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