SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan


Who can establish a SIMPLE IRA plan?

Any employer (including self-employed individuals, tax-exempt organizations and governmental entities) that had no more than 100 employees with $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 eligibility requirements (see Participation FAQs).

If you have more than 100 employees and you’re not in a grace period (see below) for your SIMPLE IRA plan, you must correct this mistake.

How do I establish a SIMPLE IRA plan?

You must complete three basic steps to set up a SIMPLE IRA plan.

  1. Adopt a SIMPLE IRA plan document by signing one of these documents:
    • IRS model SIMPLE IRA plan using either
      • Form 5305-SIMPLE PDF (if you require all contributions to be deposited initially at a designated financial institution) or
      • Form 5304-SIMPLE PDF (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 employee contributions prior to the employee election period (generally, 60 days prior to January 1).
  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. The effective date cannot be before you actually establish the plan.

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.

Is there a grace period if the plan sponsor 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. There are special rules if the failure to satisfy the 100-employee limitation is due to an acquisition, disposition or similar transaction involving your business. If this is your case, see your tax advisor.

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 retirement plan?

Generally, you can’t contribute to a SIMPLE IRA plan for a calendar year if you maintain another retirement plan and any of your employees receives an allocation or accrues a benefit under the other plan during that calendar year (the “one-plan requirement”).

However, you can have a SIMPLE IRA plan even though you maintain another retirement plan if:

  • The other plan is only for employees covered under a collective bargaining agreement, and the SIMPLE IRA plan excludes these employees; or
  • Your business was part of an acquisition, disposition or similar transaction during the current calendar year or the 2 prior calendar years, and only your separate employees participate in the SIMPLE IRA plan.

If you maintain another retirement plan and one of the exceptions above does not apply, you must correct this mistake.

Do profit-sharing contributions (for a profit-sharing plan with a calendar-year plan-year) allocated for last calendar year but deposited this year prevent me from meeting the one-plan requirement?

No, deposits made in a calendar year don’t mean that you made contributions to or accrued benefits under another retirement plan. For the SIMPLE IRA rules, you’re treated as having another plan for the year for which contributions are allocated, but not the year they’re deposited. You can set up a SIMPLE IRA plan for this year if you meet the other SIMPLE IRA plan requirements and your employees don’t receive any allocations or accrue benefits from another plan for this year.

If you have a non-calendar-year profit-sharing plan, you can’t have a SIMPLE IRA plan this year if your employees received plan allocations for a plan year that overlaps (begins or ends within) this calendar year.

Do I ever need to update my SIMPLE IRA plan document?

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 have received an amended plan document from your financial institution. If you believe the law affecting your plan has changed and you haven’t received a new plan document, contact the financial institution. If you set up your plan with an IRS Form 5304 or 5305-SIMPLE, adopt a new form when the instructions require it.

If you haven’t updated your SIMPLE IRA plan for the most current law changes, you must correct this mistake.

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