Not every employer and employee is eligible for a SIMPLE IRA. Here's what you need to know.
Any employer who meets the following requirements is eligible to establish a SIMPLE IRA plan:
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.
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 2018. To participate in ABC's SIMPLE IRA, an employee must have received at least $5,000 in compensation during any two years preceding 2018; the employee must also be reasonably expected to receive at least $5,000 for 2018.
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 2018, Tom suffered an injury and was forced to cut back on the number of hours he worked. As a result, Tom's compensation for 2018 totaled $3,000.
Although Tom did not earn $5,000 for 2018 (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:
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.
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.
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 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:
For common-law employees, compensation is based on W-2 wages. Compensation for sole proprietors is based on Schedule C income; for partners in a partnership, it is based on Schedule K-1 income. An employee's compensation in excess of $275,000 ($280,000 in 2019) may not be considered for the purposes of making a SIMPLE IRA nonelective contribution.SIMPLE IRAs: Contributions