Small Employer Retirement Plans! A SIMPLE Solution—Part II
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  • Small Employer Retirement Plans! A SIMPLE Solution—Part II

    Mike Schiller Onward

    by Mike Schiller, Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published November 04, 2018



    Introduction

    Recently we posted the first part of a three-part article that concentrates on Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) individual retirement account (IRA) plans. We discussed employer and employee eligibility as they relate to a SIMPLE IRA plan and provided an example relating to employee eligibility for a home remodeling business owned by an individual named Terry. This second part of our three-part article will concentrate on SIMPLE IRA plan establishment, SIMPLE IRA establishment, and SIMPLE IRA contributions. However, before getting into the details of those topics let’s review what a SIMPLE IRA plan is.

    What is a SIMPLE IRA Plan?

    A SIMPLE IRA plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. A SIMPLE IRA plan offers the simplicity of an IRA, but allows employee and requires employer contributions, and lacks most of the administrative complexities that usually accompany the more complicated employer qualified plans (QPs). There are two startup components to the SIMPLE IRA plan―the SIMPLE IRA plan establishment process and necessary documentation and the SIMPLE IRA establishment process and necessary documentation.

    Establishing a SIMPLE IRA Plan

    Available from the Internal Revenue Service (IRS) are two model documents that allow an employer to easily establish a SIMPLE IRA plan. Although an employer could establish a SIMPLE IRA plan with an IRS approved prototype document, this article will focus on establishment using an IRS model document.  When using one of the IRS model documents, an employer’s choice of which document it uses to establish a SIMPLE IRA plan will dictate the subsequent responsibilities of the financial organization that maintains the SIMPLE IRAs.

    IRS Form 5304-SIMPLE—Employees Choose Their SIMPLE IRA Custodian/Trustee

    The Form 5304-SIMPLE document allows each employee to establish a SIMPLE IRA with a custodian/trustee of his/her choice. In this case, the individual custodian/trustee of each employee’s SIMPLE IRA must fulfill specific notice requirements which will be explained in Part III of this article.

    IRS Form 5305-SIMPLE—Employer Chooses the SIMPLE IRA Custodian/Trustee

    The Form 5305-SIMPLE document requires each eligible employee to establish his/her SIMPLE IRA with a “designated financial institution” (DFI). In this case, the DFI must fulfill the “Summary Description” requirement which will be explained in Part III of this article. Furthermore, due to the restriction placed on them by the employer, a DFI must allow plan participants to transfer SIMPLE IRA assets on a periodic basis without cost or penalty.

    Establishing a SIMPLE IRA

    Each eligible employee must establish a SIMPLE IRA to accept salary deferral and employer contributions. Custodians/trustees may use one of the IRS model SIMPLE IRA agreements:  IRS Form 5305-S—SIMPLE Individual Retirement Trust Account, or IRS Form 5305-SA—SIMPLE Individual Retirement Custodial Account. These SIMPLE IRAs can generally accept and hold only SIMPLE contributions and rollovers and transfers from other SIMPLE IRAs. Traditional and Roth IRAs cannot accept SIMPLE deposits.

    SIMPLE Contributions

    Prior to the beginning of each SIMPLE IRA plan year, which is always calendar-year based, an employer must make an irrevocable election to deposit either a matching contribution or a nonelective contribution to eligible participant’s SIMPLE IRAs. Matching contributions will be made only on behalf of those eligible employees who choose to defer their own salary or wages into the plan. However, if selected, an employer must make nonelective contributions for all eligible employees, regardless of the employee’s choice to defer. SIMPLE IRA plans require an employer contribution each year.

    Employee Deferral Contributions

    Each eligible employee must be given the opportunity to elect to reduce his/her salary and have that amount contributed to a SIMPLE IRA, regardless of the type of contribution (i.e., matching vs. nonelective) the employer may choose to make.

    An employee may express his/her pretax salary deferral amount as a percentage of compensation—with no percentage limit. However, the law limits salary deferral amounts, which are subject to an annual cost-of-living adjustment (see Exhibit A for deferral limits). Like 401(k) deferrals, the SIMPLE deferral amount is subject to social security withholding and federal unemployment taxes, but is not subject to federal or state income tax withholding.

    An employer has a responsibility to deposit an employee’s deferrals into the employee’s SIMPLE IRA as soon as reasonably possible, not to exceed 30 days from the end of the month in which the deferral occurred. Employers should not view the 30 days as an allowable “float” period either—it’s conceivable that with today’s technology, deferral deposits could be made almost instantaneously.

    Matching Contributions

    An employer’s matching contributions must equal an employee’s deferral, but never in excess of 3 percent of an employee’s compensation. Employers may make matching contributions as late as the due date (plus extensions) of their tax return for the tax year within which the SIMPLE IRA plan year ends.

    An employer may choose to reduce the 3 percent matching contribution requirement—however, never below 1 percent—and never any more than two years out of the five-year period that ends with the current year. For purposes of this rule, any year that a SIMPLE IRA plan did not exist or any year an employer makes a nonelective contribution may be “treated” as a year or “deemed” a year for which a 3 percent matching contribution was made.

    Nonelective Contributions

    Rather than making matching contributions, an employer could make a 2 percent nonelective contribution on behalf of each eligible employee, regardless of whether an employee chooses to make deferral contributions. The nonelective contribution amount is subject to an annual compensation limit which for 2018 is $275,000 and for 2019 is $280,000. As a result, the 2018 maximum nonelective contribution for any employee is $5,500 (i.e., $275,000 x .02) and for 2019 is $5,600 (i.e., $280,000 x .02).

    Employers may also make nonelective contributions as late as the due date (plus extensions) of the employer’s tax return for the tax year within which the SIMPLE IRA plan’s calendar year ends.

    Example

    Terry, the owner of a home remodeling business, plans to establish a SIMPLE plan for 2019 and wants to restrict employer matching contributions of salary deferrals to 1 percent of compensation as often as possible for the first few years. The following chart shows which years Terry can lower matching contributions without violating the two-out-of-five-year rule.

    Terry’s Possible Contributions
    Year
    SIMPLE Status
    Employer Contribution
    2016
    Inactive
    3% Matching Deemed
    2017
    Inactive
    3% Matching Deemed
    2018
    Inactive
    3% Matching Deemed
    2019
    Active
    Matching Reduction to 1%
    2020
    Active
    Matching Reduction to 1%
    2021
    Active
    3% Matching or 2% Nonelective Required
    2022
    Active
    3% Matching or 2% Nonelective Required
    2023
    Active
    3% Matching or 2% Nonelective Required
    2024
    Active
    Matching Reduction to 1%
    2025
    Active
    Matching Reduction to 1%
    Note: The 2 percent nonelective contribution is always an alternative to a matching contribution. If used, the nonelective contribution is deemed a 3 percent matching contribution for purposes of this rule.

    Summary

    Just how many of your business customers could use a plan like the SIMPLE IRA plan? Adding the SIMPLE IRA plan and SIMPLE IRAs to your list of product offerings is not just good for some of your local business owners, but good for you too! Making the SIMPLE IRA plan available could help your financial organization stay in front of the competition, and could help you attract and strengthen relationships with your local business owners.

    If you think the SIMPLE plan and SIMPLE IRAs might be worth adding to your product line, watch for “Part III” of this article, which will discuss some of the ongoing responsibilities of an IRA custodian/trustee.

    Exhibit A: SIMPLE salary deferral contribution limits have increased since 2011 as follows:

    Year
    Deferral Limit*
    Additional Deferral Amount (Participants Age 50 and Older)
    Total Deferral Limit (Participants Age 50 and Older)
    2011
    $11,500
    $2,500
    $14,000
    2012
    $11,500
    $2,500
    $14,000
    2013
    $12,000
    $2,500
    $14,500
    2014
    $12,000
    $2,500
    $14,500
    2015
    $12,500
    $3,000
    $15,500
    2016
    $12,500
    $3,000
    $15,500
    2017
    $12,500
    $3,000
    $15,500
    2018
    $12,500
    $3,000
    $15,500
    2019
    $13,000
    $3,000
    $16,000

    *Subject to annual cost-of-living adjustment (COLA) with increases made in $500 increments.

    Look forward to Part III of this article as it will explain the 60-day election period, custodian/trustee and employer notification requirements, restrictions during the first two years of participation, and reporting.

    For an opportunity to learn more about IRAs and other tax advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider joining us for one of our IRA, HSA, or CESA Live Streaming events offered on a variety of topics. For more information call us at 1-800-552-9408.



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