SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan

Who can establish a SIMPLE IRA plan?

Any employer (including self-employed individuals, tax-exempt employers and governmental entities) that has no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year (the "100-employee limitation") can establish a SIMPLE IRA plan. For purposes of the 100-employee limitation, you must take into account all employees employed at any time during the calendar year, including those employees who have not met the plan's minimum eligibility requirements (see Participation FAQs).

How do I establish is a SIMPLE IRA plan?

There are three basic steps in setting up a SIMPLE IRA plan, all of which must be satisfied.

1. Adopt a SIMPLE IRA plan document by signing one of these documents:
   • IRS model SIMPLE IRA plan using either
     • Form 5305-SIMPLE (if you require all contributions to be deposited initially at a designated financial institution), or
     • Form 5304-SIMPLE (if you permit each employee to choose the financial institution for receiving contributions).
       
       
   • IRS-approved prototype SIMPLE IRA plan offered by banks, insurance companies and other qualified financial institutions
     
     
2. Provide each eligible employee with certain information about the SIMPLE IRA plan and SIMPLE IRA where you'll deposit the employee’s contributions prior to the employees' election period. Generally, the election period is 60 days prior to January 1 of a calendar year.
3. Set up a SIMPLE IRA for each eligible employee using either IRS model:
   • Form 5305-S (a trust account) or
   • Form 5305-SA (a custodial account).

You can set up SIMPLE IRAs with banks, insurance companies or other qualified financial institutions. The employee owns and controls the SIMPLE IRA.

Is there a deadline to set up a SIMPLE IRA plan?

You can set up a SIMPLE IRA plan effective on any date between January 1 and October 1, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that came into existence after October 1 of the year, you can establish the SIMPLE IRA plan as soon as administratively feasible after your business came into existence. If you previously established a SIMPLE IRA plan, you must set up a new one effective on January 1.

Can I maintain my SIMPLE IRA plan on a fiscal-year basis?

You may only maintain a SIMPLE IRA plan on a calendar-year basis.

When must the SIMPLE IRA be set up for an employee?

A SIMPLE IRA must be set up for an employee before the first date by which you must deposit a contribution 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 you must contribute to the employee’s SIMPLE IRA, you should establish a SIMPLE IRA for the employee with a financial institution that you select.

Can I contribute to my SIMPLE IRA plan if I maintain another qualified plan?

Generally, you can’t contribute to a SIMPLE IRA plan for a calendar year if you, or a predecessor employer, maintain a qualified plan (other than the SIMPLE IRA plan) under which any of your employees receives for any plan year beginning or ending within that calendar year:

• an allocation of contributions in a defined contribution plan, or
• an accrual in a defined benefit plan.

“Qualified plan” includes any plan qualified under Internal Revenue Code Sections 401(a), 403(b) or 457(b) plan, a SEP, a trust described in Section 501(c)(18), and a SIMPLE IRA plan. This "no-other-plan limitation" applies on a year-by-year basis.

However, you can make contributions under a SIMPLE IRA plan for a calendar year even though you maintain another qualified plan if either:

• The other qualified plan you maintain 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 you maintain 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 you 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.

Do I need to update my SIMPLE IRA plan?

It's your responsibility to ensure that you keep your plan up-to-date with current law. If you set up your plan with a prototype plan document, you should've received an amended plan from the financial institution that provided it. If you didn’t receive a new plan document, contact the financial institution. If you set up your plan with a Form 5304 or 5305-SIMPLE, adopt a new form when the IRS updates it.

Is there a grace period if my business ceases to satisfy the 100-employee limitation?

If you previously maintained a SIMPLE IRA plan, you satisfy the 100-employee limitation for the 2 calendar years immediately following the calendar year for which you 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 your business, then the 2-year grace period will apply only in accordance with rules similar to the rules of section 410(b)(6)(C)(i).

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