Thank you for attending this session on SIMPLE Plan Options for Small Businesses.

The information in this session isn’t official guidance.

Our topic today is SIMPLE IRA Plans. What is a SIMPLE IRA plan? The SIMPLE acronym stands for: “Savings Incentive Match Plan for Employees.” These types of plans are easy to set up, easy to maintain, and don’t have any IRS filing requirements. They allow contributions to be made by the employee and the employer.

Additionally, employers can receive a tax credit of up to $5,000 for 3 years for start-up costs related to setting up a new SIMPLE Plan.

Now, let’s look at the requirements for maintaining a SIMPLE IRA to help you decide if this is the right plan for your small business.

To set up your SIMPLE IRA Plan, you must complete Form 5304-SIMPLE or Form 5305-SIMPLE.

You could also adopt a prototype document issued by a financial institution or an individually designed plan.

Note that there is no requirement that the plan file Form 5500 with the IRS. Next, we'll talk about SIMPLE plan eligibility.

What are the eligibility requirements to maintain a SIMPLE? Your business must have 100 or fewer employees to maintain this type of plan.

Also, Simple Plans are subject to the exclusive plan rule - you can’t maintain any other retirement plans (a 401k or other IRA)

while maintaining a SIMPLE IRA plan. What are the eligibility requirements for employees to participate in the plan?

All Employees that made at least $5,000 in any two prior years and are expected to make at least $5,000 in the current year must be eligible to participate. Further, the employer can make the eligibility requirements less restrictive by requiring less compensation to be eligible, which would allow more employees to participate.

Now, we’ll look at SIMPLE contributions.

How much can be contributed to a SIMPLE? Employers and employees can make contributions to a SIMPLE.

Both types of contributions are always 100% vested. Employees can defer up to $13,500 of their compensation for 2020 and 2021.

Unlike some of the other IRAs, the SIMPLE IRA does require certain employer contributions.

You have two options for the required employer contribution: A 3% match on 100% of the employee deferrals, or a non-elective contribution of 2% of each employee’s compensation, regardless of profits. If you choose the match, you can reduce it to 1%, but you can only do this for 2 out of 5 years.

You can’t reduce the match in the middle of the year.

However, you can make contributions through the due date of the tax return (including extensions).

Also, no employer contributions are allowed besides the match or 2% non-elective contribution.

What are the withdrawal options with a SIMPLE? Employees own their SIMPLE IRAs.

As mentioned before, employees are always 100% vested in both employee and employer SIMPLE IRA contributions.

Withdrawals of SIMPLE funds are allowed from the plan at any time and are subject to income tax.

The tax (or penalty) for withdrawing funds before an employee turns age 59 ½ is typically 10%.

This penalty increases to 25% if funds are withdrawn within 2 years after the employee first participates in the plan.

What are some of the common errors found in SIMPLE IRA plans?

The employer didn’t update the SIMPLE IRA plan document for current law changes.

The employer had more than 100 employees who earned $5,000 or more in compensation for the prior year.

The employer sponsors another qualified retirement plan.

The employer excluded an eligible employee from participating in the plan.

The employer used the wrong compensation definition to calculate deferrals and contributions for participants.

The employer must use the definition in the plan document.

What are some common errors with see with SIMPLE IRA Plans?

The employer made incorrect employer contributions for eligible employees.

The employer must follow the formula in the plan document.

The employer didn’t timely deposit employee elective deferrals.

Employee elective deferrals must be timely deposited.

Deferrals must be remitted to the appropriate financial institution as soon as possible.

The IRS has not determined what is reasonable, but has determined that it is UNreasonable to make the deposit more than 15 days following the month in which the employee would have otherwise received the money. The Dept. of Labor rules require salary deferrals to be deposited within 7 business days of when they were withheld from the employee’s pay.

Employer contributions weren’t given to eligible employees who terminated during the year.

Annual SIMPLE IRA plan notification requirements weren't followed.

You must notify employees before the beginning of each period of their opportunity to make salary reductions, their ability to select a financial institution to serve as the trustee to their IRA (if applicable), whether you will make matching or non-elective contributions, and a written notice that they can transfer their balance without cost or penalty if you use a designated financial institution. Generally, the period to give this notice is Nov 2 to Dec 31.

What are some additional SIMPLE IRA resources that are available to you?

If you visit our website at www.irs.gov/retirement and select “Types of Retirement Plans” and then select “SIMPLE IRA plans,” you’ll find a wealth of helpful information on these types of plans.

Also, under additional resources, we have two publications that may benefit you when considering a SIMPLE IRA: Publication 4334, SIMPLE IRA Plans for Small Businesses, and Publication 3998, Choosing a Retirement Solution for Your Small Business.

We also have a page dedicated to SIMPLE IRA operation. Additionally, you’ll want to check out our SIMPLE IRA Fix-it Guide if you have a SIMPLE plan and find errors with your plan. All these resources are available on our webpage at irs.gov/EP.

Please send any questions to us at tege.outreach@irs.gov.

We’ve covered the requirements to maintain a SIMPLE IRA plan, common errors found in these types of plans and some additional resources available to you to setup and operate your SIMPLE IRA.

We hope this session will help you decide if a SIMPLE IRA plan is right for you. Thank you for attending our session.