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SIMPLE IRA ACCOUNTS Employer Eligibility
An employer can always choose to make all employees immediately eligible to participate in the SIMPLE, however, the employer can exclude the following classes:
To establish a SIMPLE IRA, both the employer and employee must execute documents, as outlined below: Employer 1. To establish a SIMPLE plan, the employer must complete the Prototype SIMPLE Retirement Plan Adoption Agreement and the SIMPLE IRA Summary Description. This adoption agreement defines the eligibility requirements, allocation formula for employer contributions and salary deferral contributions, and the investment provisions. 2. Employer must provide copies of the Prototype SIMPLE Retirement Plan document, the executed Plan Adoption Agreement, and the SIMPLE IRA Summary Description. 3. The employer may not establish a new SIMPLE plan for a given year after October 1 of that year. 4. The employer must allow eligible employees a 60 day period in which to make participation and salary deferral elections and changes. Employee 1. Employee must complete the SIMPLE Individual Retirement Account Adoption Agreement (Form 5305-SA) to establish the IRA account. Employee must receive a copy of the SIMPLE Individual Retirement Account Custodial Agreement and Disclosure Statement at the time he executes the Adoption Agreement. 2. The employee must complete a Salary Deferral Election Form stating their deferral amount. SIMPLE IRA CONTRIBUTIONS Employee Contributions An employee may elect to make salary deferral contributions to a SIMPLE IRA account. There is no limit on the percentage of the salary deferral; and employee may elect to defer up to 100% of his compensation, provided the total contribution amount does not exceed the annual deferral limit. The elective deferral limit for SIMPLE IRA's are presented in the table below:
For years following 2005, the elective deferral limit will be increased in increments of $500 for cost of living adjustments (COLA's). Additional "catch up" salary deferral contributions may be made to SIMPLE IRA accounts for participants who have attained the age of 50 by year-end. Catch up amounts and total contribution limits for participants age 50 and older are given below:
Elective deferrals to a SIMPLE IRA are excluded from the gross income of the participant Elective deferral amounts are subject to FICA and FUTA taxes. Elective deferral contributions withheld from the employee must be made to the employee's SIMPLE IRA no later than 30 days following the last day of the month after being withheld from the employee's wages. Employer Contributions An employer who sponsors a SIMPLE plan must make some type of contribution for his employees, however he has the option of making either matching contributions or non-elective contributions for any tax year. If the employer chooses matching contributions, he is generally required to match the employee's elective deferral contribution dollar for dollar up to 3% of the employee's compensation. The maximum match for any employee equals that employee's contribution limit for the year. The employer could elect to match at a lower percentage, down to a limit of 1%, in two of five years. If the employer chooses non-elective contributions, he is required to contribute an amount equal to 2% of each eligible employee's compensation for each employee who is eligible to participate and has earned at least $5,000 in compensation for the year. The employee is not required to make a salary deferral contribution to receive the employer's non-elective contribution. For purposes of the non-elective contributions, eligible compensation is limited to $200,000. Regardless of whether the employer chooses non-elective or matching contributions, he is required to provide notice of his funding election within a reasonable time before the 60 day period prior to the beginning of the year for which the contributions will be made. This is generally accomplished when the employer does the Summary Description mailing in October. Employer non-elective or matching contributions must be made to the accounts no later than the employer's tax filing deadline, including extensions. Vesting of Contributions Since contributions are made to the participant's IRA, all contributions are fully and immediately vested. SIMPLE ROLLOVERS AND TRANSFERS Rollovers and transfers must only be made between SIMPLE accounts, not between SIMPLE and other IRA accounts. After the two year holding period has elapsed, the participant may rollover assets from the SIMPLE account to an IRA, or convert the assets to a Roth IRA. SIMPLE DISTRIBUTIONS Distributions from a SIMPLE IRA are taxed as ordinary income when distributed. Distributions from a SIMPLE IRA follow all the rules for distributions from a traditional IRA, with two exceptions: 1. Simple Pre-2 Year Distributions The IRS imposes a 25% penalty on distributions taken from a SIMPLE IRA within two years of the date of the first contribution to the SIMPLE account. 2. Required Beginning Date May be Delayed If a person is still working and has compensation once they have attained the age of 70 ½, required minimum distributions may be delayed until the year following the year the participant retires. SIMPLE NON-DISCRIMINATION TESTING As long as the SIMPLE plan is run according to the IRS regulations, the plan is exempt from discrimination testing including the ADP, ACP, and Top-Heavy testing. In addition, the employer is not required to file Form 5500 with the IRS. CONTRIBUTION DEDUCTIBILITY For the employee, salary deferral contributions are not included in the employee's gross income. Employer contributions to the employee's account are not included in the employee's compensation. For the employer, salary deferral contributions made by the employees are considered employer contributions for purposes of deductibility. In addition, the non-elective or matching contributions made by the employer are deductible on the tax return for the year for which the contributions were made. SIMPLE IRA REPORTING REQUIREMENTS SIMPLE IRA reporting requirements are identical to traditional IRA reporting requirements. SIMPLE Summary Description Mailing SIMPLE employers are required to notify plan participants 60 days prior to the beginning of the plan year of certain plan information. The trustee (or custodian) must provide a Summary Description to the SIMPLE employer in sufficient time to allow the employer to meet the annual notification requirement. Generally, the trustee forwards the Summary Description form to the employer in September or October, and the employer completes the required information and gives a copy of the form to each of his employees. Information included on the form includes the requirements for participation, the benefits provided, and the procedures for withdrawals. WHY OFFER A SIMPLE IRA? Salary deferral contributions made by the employees and employer contributions made to the participant's SIMPLE IRA are deductible by the employer. Complicated non-discrimination testing and 5500 reporting is not required. Earnings accumulate in the account tax deferred. Salary deferral plans are considered a valuable benefit by employees. Employer has no fiduciary responsibility. Contributions are invested in individual's IRA, and individual makes all investment decisions. |