Small Employer Retirement Plans! A SIMPLE Solution—Part III | Wolters Kluwer
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  • Small Employer Retirement Plans! A SIMPLE Solution—Part III

    Mike Schiller Onward

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

    Published November 27, 2018


    Recently we posted the first two parts of a three-part article that concentrates on Savings Incentive Match Plan for Employees of Small Employers (SIMPLE plan) rules and SIMPLE individual retirement accounts (IRAs). In Part I of this article we discussed employer and employee eligibility as it relates to a SIMPLE plan and provided an example relating to employee eligibility for a home remodeling business owned by an individual named Terry. In Part II of this article we discussed SIMPLE plan establishment, SIMPLE IRA establishment, and SIMPLE plan contributions to SIMPLE IRAs. This third and final part of our article will concentrate on some of the ongoing responsibilities a SIMPLE IRA custodian/trustee has as it relates to SIMPLE plans and SIMPLE IRAs. A custodian’s/trustee’s responsibilities for SIMPLE IRAs are a little more involved than for traditional and Roth IRAs—but not nearly as complicated as they would be for 401(k), pension, and profit sharing plans. Before we explain some of the responsibilities a SIMPLE IRA custodian/trustee has, let’s review what a SIMPLE plan is.

    What is a SIMPLE Plan? 

    A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. The IRA version, vs. 401(k) version, of a SIMPLE plan offers the simplicity of an IRA, but requires employ-er contributions and allows employ-ee salary reduction contributions, and lacks most of the administrative hassles that usually accompany the more complicated employer qualified plans. After a SIMPLE plan is established an employer provides an election period for employees to elect whether they will participate in the deferral process and if so how much they elect to defer.

    60-Day Election Period

    An employer that offers a SIMPLE plan must provide an annual 60-day (or more) period within which employees can elect to make or modify a salary reduction agreement. For existing SIMPLE plans, this period is 60 days prior to the beginning of each calendar year, so the latest an election period can begin is November 2, continuing through December 31.

    IRA Custodian/Trustee and Employer Notice Requirements

    Prior to the 60-day period, both the SIMPLE IRA custodian/trustee and the employer must fulfill certain responsibilities in order for a SIMPLE plan to be established and maintained properly.

    Annual IRA Custodian/Trustee Notification Requirements

    Prior to the 60-day election period each year, a SIMPLE IRA custodian/trustee must provide a “Summary Description” to an employer offering a SIMPLE plan. The Summary Description details the method and time for making elections, and the procedures for and effects of taking distributions from a SIMPLE IRA. Failure to properly provide the required information may result in a $50 penalty to the SIMPLE IRA custodian/trustee. However, a custodian/trustee may meet its notification requirement by providing the employer with a current copy of the 5304-SIMPLE (or 5305-SIMPLE) and instructions, Procedures for Withdrawal, and the custodian’s/trustee’s name and address.

    Annual Employer Notification Requirements

    Also prior to each 60-day election period, an employer must communicate certain information about the SIMPLE plan to its eligible employees. Along with the “Summary Description” from the custodian/trustee, an employer must provide written notice to each of its employees regarding the SIMPLE plan election rules. Most importantly, an employer’s annual notification informs the employees of the employer’s contribution choice for the plan year (see the discussion on employer contributions in Part II of this article), and gives each employee the opportunity to make a new, or modify an existing, salary deferral election.

    Since the lack of communication between a SIMPLE IRA custodian/trustee and an employer and its employees could affect proper SIMPLE plan establishment as well as proper notice requirements, business owners should seek professional guidance for complete annual notification requirements. Why? Because each failure to properly provide the required information to employees could result in a $50 penalty—this time, to the employer!

    Two-Year Restriction on SIMPLE IRA Assets

    An individual can roll or transfer his/her SIMPLE IRA assets to another SIMPLE IRA at any time. However, an individual cannot roll over or transfer SIMPLE IRA assets to a traditional IRA until after a two-year period, beginning on the date his/her employer makes the first deposit into the SIMPLE IRA, has expired. Furthermore, an individual cannot convert SIMPLE IRA assets to a Roth IRA during this two-year period. Any SIMPLE IRA assets that are rolled over or transferred to a traditional or Roth IRA during the two-year period are subject to a 25 percent IRS penalty. That’s not all! SIMPLE IRA assets erroneously rolled over, transferred, or converted are taxable and likely excess contributions—making them subject to a 6 percent excess contribution penalty.

    Although a participant is responsible for paying the penalties, a SIMPLE IRA custodian/trustee is responsible for monitoring the two-year period. Custodians/trustees should adequately document the beginning of each SIMPLE IRA owner’s two-year period.

    After the two-year period has expired, SIMPLE IRA assets may be rolled over or transferred to a traditional IRA, or can be converted to a Roth IRA, or rolled over to an eligible employer retirement plan, considering the plan has a provision to accept SIMPLE IRA assets.

    SIMPLE IRA Distributions

    The SIMPLE IRA follows most of the same distribution rules that apply to traditional IRAs. Distributions prior to an owner reaching age 59½ are subject to an IRS 10 percent penalty, unless made for one of the penalty-free distribution reason (e.g. death, disability, IRS levy, substantially equal periodic payments, higher education, first-time homebuyer, certain medical expenses, health insurance premiums, etc.). However, because of the two-year restriction previously discussed, any SIMPLE IRA distribution normally subject to an IRS 10 percent penalty during the first two years is instead subject to a 25 percent penalty.

    A SIMPLE IRA is also subject to the IRA required minimum distribution rules when a SIMPLE IRA owner attains age 70½, and to beneficiary distribution rules after an owner’s death.


    Although a SIMPLE IRA custodian’s/trustee’s reporting procedures are similar to the reporting responsibilities for other types of IRAs, there are some critical differences.

    IRS Form 5498

    IRA custodians/trustees must report all contributions and the fair market value (FMV) on Form 5498. However, custodians/trustees report SIMPLE IRA contributions for the year in which the contributions are made (similar to Simplified Employee Pension—SEP—reporting), not the year for which the contributions are made (as are traditional and Roth IRA regular and spousal contributions).

    The IRS reporting instructions for Form 5498 also state that a participant should receive an activity report by January 31 of each year.

    IRS Form 1099-R

    Custodians/trustees report distributions from a SIMPLE IRA on Form 1099-R. IRS distribution codes are the same as the traditional IRA—with one exception: Custodians/trustees use IRS Code S to report an early distribution within the two-year period previously discussed.


    So why might an employer offer a SIMPLE plan? The benefits lie in establishing a retirement plan for employees and the ability to take a tax deduction for any contributions made to the employee’s SIMPLE IRAs. For a financial organization, teaming up with an employer that offers a SIMPLE plan by acting as a SIMPLE IRA custodian/trustee provides a great way to attract additional deposit assets, and provides an opportunity to strengthen relationships with existing account owners.


    This three-part article was intended to provide you with an overview of what a SIMPLE plan is by addressing at a high level the primary components of establishment and administration.  Wolters Kluwer offers an IRA Library, available in paper or electronic book, which includes comprehensive procedures for administering SIMPLE plans at a financial organization level. For more information, please call Wolters Kluwer at 1-800-397-2341.

    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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