Establishing a SIMPLE IRA Plan


Starting a SIMPLE IRA plan is easy to do!

Choosing a Financial Institution

You’ll need to choose a financial institution to serve as trustee of the SIMPLE IRAs to hold each employee’s/participant’s retirement plan assets. These accounts will receive the contributions you make to the plan. Alternatively, you can decide to let employees choose the financial institution that will receive their contributions.

Three Steps to Set up a SIMPLE IRA Plan

There are three steps to establishing a SIMPLE IRA plan.

  • Execute a written agreement to provide benefits to all eligible employees
  • Give employees certain information about the agreement
  • Set up an IRA account for each employee

Execute a Written Agreement

You can use Form 5304-SIMPLE PDF or Form 5305-SIMPLE PDF to set up a SIMPLE IRA plan. Each form is a model Savings Incentive Match Plan for Employees (SIMPLE) plan document.

  • Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions.
  • Use Form 5305-SIMPLE if you will deposit all SIMPLE IRA plan contributions at an employer-designated financial institution.

You adopt the SIMPLE IRA plan when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Keep the original form. Do not file it with the IRS.

Alternatively, you may use a prototype document. A mutual fund, insurance company, bank or other qualified institution usually provides these. You may also have an individually designed plan.

Annual Notice to Eligible Employees

You must notify each employee before the beginning of the election period of:

  1. The employee’s opportunity to make or change a salary reduction choice under the SIMPLE IRA plan;
  2. The employees’ ability to select a financial institution that will serve as trustee of the employees’ SIMPLE IRA, if applicable;
  3. Your decision to make either matching contributions or nonelective contributions;
  4. A summary description (the financial institution should provide this information); and
  5. Written notice that the employee can transfer his or her balance without cost or penalty if you are using a designated financial institution.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31). However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.

If you set up your SIMPLE IRA plan using either Form 5304-SIMPLE or Form 5305-SIMPLE, you can give each employee a copy of the signed forms to satisfy the notification requirement.

Set Up a SIMPLE IRA for Each Eligible Employee

A SIMPLE IRA must be set up by or for each eligible employee and all contributions to the plan must go to it.

A SIMPLE IRA cannot be a Roth IRA.

Financial institutions authorized to hold and invest SIMPLE IRA plan contributions include banks, savings and loan associations, insurance companies, certain regulated investment companies, federally-insured credit unions and brokerage firms. SIMPLE IRA plan contributions can be put into stocks, mutual funds and other similar types of investments. The investment options available at the institution where the SIMPLE IRA is located will determine what kinds of investment choices are available to the employee as he or she makes decisions about investing his or her SIMPLE IRA accounts.

You and your employees will receive a statement from the financial institutions investing your SIMPLE IRA plan contributions both at the time you make the first SIMPLE IRA plan contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SIMPLE IRA assets.

Timing of Setting Up a SIMPLE IRA Plan

You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan.

"Why SEP or SIMPLE IRAs are Hassle-free Retirement Plans" video - a discussion on two types of retirement plans (SEP and SIMPLE IRA) that are tailored for many businesses.