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Small businesses have a new vehicle to help
their employees save for retirement. Called the SIMPLE
plan—Savings Incentive Match Plan for Employees of Small
Employers—it gives businesses with 100 or fewer employees an
affordable way to offer retirement benefits through employee
salary reductions and matching contributions (similar to those
found in a 401(k) plan).
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On
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SIMPLE plans are authorized by the Small
Business Job Protection Act of 1996. They offer employees of
small businesses—which comprise over 38 percent of the
nation's private workforce—a convenient and inexpensive way
to save. Having a SIMPLE plan may also offer another
advantage: It can provide small employers with a new incentive
to attract and retain qualified employees in a competitive
environment.
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A SIMPLE plan is ideally suited as a
start-up retirement savings plan for small employers who do
not currently sponsor a retirement plan. Some advantages are:
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Eligible employees can contribute up to
$6,000 each year through convenient payroll deductions.
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Employers offer matching contributions
equal to employee contributions (up to 3 percent of
employee wages) or fixed contributions equal to 2 percent
of employee wages.
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SIMPLE plans eliminate many of the
administrative costs associated with larger retirement
plans.
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Model plan documents, employee notices
and salary reduction agreements are available from the
IRS.
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This booklet highlights the basic features
and requirements of SIMPLE plans that involve individual
retirement accounts or annuities (SIMPLE IRAs). It does not
address SIMPLE 401(k) plan arrangements.
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Any employer with no more than 100
employees who earned $5,000 or more during the preceding
calendar year is eligible to establish a SIMPLE plan.
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However, an employer that currently
sponsors another retirement plan generally cannot sponsor
a SIMPLE plan.
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SIMPLE plans can be sponsored by most
types of organizations, including C-corporations,
S-corporations, partnerships and sole proprietorships.
Related employers (businesses under common control, for
instance) are treated as a single employer.
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A tax-exempt employer or governmental
entity may start a SIMPLE plan as long as the basic
requirements are met.
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An added note for employers establishing a
SIMPLE plan: When employers start these plans, they have two
options as to where the contributions are deposited:
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The employer may choose the financial
institution that will receive all contributions under the
plan. In this case, employees will have a right to
transfer contributions to a SIMPLE IRA at another
financial institution without cost or penalty.
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Each employee may make the initial
choice of financial institution to receive contributions.
In this case, an employee does not have the right to
transfer to another financial institution without cost or
penalty.
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SIMPLE plans can be considered an
across-the-board savings opportunity since they allow most
employees to participate. Small business owners also can take
part as owner/employees. Here are the key participation rules:
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Employees who are reasonably expected
to receive at least $5,000 in compensation from their
employer during a calendar year and who did so in any 2
preceding years must be eligible.
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Employers can increase the number of
employees eligible to participate by lowering the amount
an employee must earn (for example, from $5,000 to $3,000)
or by allowing all employees to participate regardless of
how much they earn.
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Employees covered by a collective
bargaining agreement for which retirement benefits were
part of good-faith bargaining may be excluded from SIMPLE
plan participation.
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SIMPLE plans offer small businesses the
opportunity to join millions of other employers who have
established retirement plans. In addition, they allow some
flexibility in the type of contributions employers provide to
employees.
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Employees contribute to SIMPLE plans by
agreeing to a salary reduction from each paycheck; they
can contribute up to $6,000 a calendar year.
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Generally, contributing employees
receive a matching contribution equal to their salary
reduction contribution (up to 3 percent of their pay).
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Alternatively, employers may contribute
a "nonelective" or fixed contribution of 2
percent of pay for eligible employees.
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Employers also may reduce the matching
contribution amount to a limit of one percent of
compensation, but certain restrictions apply to this
choice.
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Contributions are transferable to
another SIMPLE IRA tax-free in a trustee-to-trustee
transfer. (Trustees are the financial institutions that
handle SIMPLE IRAs).
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However, there is a 2-year waiting
period after the date the employee first enrolls in a
SIMPLE plan to transfer tax-free his or her contribution
to another IRA other than a SIMPLE IRA. Until this 2-year
period expires, any transfer from a SIMPLE IRA to an IRA
other than a SIMPLE IRA will incur tax consequences.
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All contributions made under a SIMPLE
plan are fully vested—that is, all contributions by the
employer and the employee immediately belong to the
employee.
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SIMPLE plans operate on a calendar year
basis, except that an employer may initially set up a SIMPLE
plan effective as late as October 1 of the
calendar year. Employees must be given the chance to enter
into a SIMPLE plan salary reduction agreement at least once a
year. Election periods must be at least 60-days long, and
employees must receive notice about an upcoming enrollment
opportunity prior to the election period.
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Other election features:
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Each annual election period immediately
precedes January 1 of that calendar year (i.e., November 2
to December 31), except that there is more flexibility
with the election period requirement when a SIMPLE plan is
initially established.
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During the election period, employees
can make a new salary reduction agreement or modify a
prior agreement.
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Employees must receive a copy of the
plan's "summary description" when they receive
notice about the election period.
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Employees may elect to terminate their
salary reduction contributions to a SIMPLE plan at any
time. However, if they end a salary reduction agreement at
a time other than a designated election period, employers
may preclude them from participating again until the
beginning of the next calendar year.
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In certain cases, employees may also
use the election period to select the financial
institution they wish to receive their SIMPLE IRA
contributions.
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When employers give each year's notice
about the enrollment period, they must:
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Provide a copy of the summary
description of the terms of the plan. This may be
accomplished by providing a completed copy of IRS Forms
5304-SIMPLE or 5305-SIMPLE (including the financial
institution's procedures for withdrawal), if the employer
used these IRS-approved forms to establish its SIMPLE
plan.
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Include information about the method
the employer will use in contributing to employees' SIMPLE
IRAs, for example, whether the method will be to match
employee contributions up to 3% of their pay or another
authorized method.
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Notify employees that they can choose
their own financial institution to serve as trustee for
their SIMPLE IRA. Or, if the employer chooses the
financial institution to receive contributions for all
employees under the SIMPLE plan, notify employees that
they have the right to transfer contributions to a SIMPLE
IRA at another financial institution without cost or
penalty.
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There are two additional facets of
notification employers should consider:
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Employers may provide additional or
longer periods of election time to their employees (for
instance, extend the election period to 90 days or provide
quarterly or semi-annual election periods).
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There are substantial penalties for
failure to notify employees before an election period.
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Choosing a financial institution to
maintain employees' SIMPLE IRAs is one of the most important
decisions employers or employees will make. Trustees work
closely with employers to receive contributions, invest them
and issue certain required information.
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For SIMPLE plan purposes, only these
institutions can be designated as trustees: banks, savings and
loan associations, insured credit unions, insurance companies
(that issue annuity contracts), or IRS-approved non-bank
trustees.
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Trustees must agree to:
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The name and address of the employer
and trustee
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A description of eligibility
requirements
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The benefits provided
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The time and method of making salary
elections; the procedure for and effects of withdrawals
and rollovers (including the penalties for early
withdrawals)
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The requirement that the trustee
provide the employer a summary description may be
satisfied by providing the most recent copy of IRS Forms
5304-SIMPLE or 5305-SIMPLE (if these forms are used to
establish the SIMPLE plans), along with the financial
institution's procedures for withdrawals and transfers.
Timing is important, because substantial penalties maybe
imposed and employers depend on receiving summary
descriptions in time to notify employees of each year's
election period.
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There are three additional trustee
requirements:
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Within 30 days after the close of each
calendar year, the trustee must provide each individual on
whose behalf an account is maintained with a statement of
the account balance and activity during the year.
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The trustee reports SIMPLE IRA
information to the IRS, the same as it does with any IRA
account.
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A trustee that is a "designated
financial institution" by agreement with the employer
also agrees to transfer, upon request, an individual's
SIMPLE IRA balance to another IRA or SIMPLE IRA without
cost or penalty to the participant.
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Eligible employers can start a SIMPLE plan
by using IRS Form 5304-SIMPLE, IRS Form 5305-SIMPLE or by
using an IRS-approved alternative form provided by a financial
institution. While IRS Forms 5304-SIMPLE and 5305-SIMPLE are
similar, there is the following difference: Form 5304-SIMPLE
is to be used by employers whose employees select their own
financial institutions to accept SIMPLE plan contributions;
Form 5305-SIMPLE is to be used by employers who wish to
designate the financial institution that will receive all
SIMPLE plan contributions.
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Copies of both forms are available from IRS
field offices located throughout the country and listed in the
phone directory under the Federal Government, Internal Revenue
Service. Financial institutions may also be able to provide
IRS-approved alternative forms.
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As with all retirement savings vehicles,
employers may wish to discuss the specifics of this new
savings plan with a tax advisor or attorney.
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Can an employee who has more
than one employer participate in a SIMPLE plan
sponsored by one employer while contributing to the
plan of a different employer?
Yes, employees can participate in
the retirement savings plans of more than one
employer. However, there are limits on the employee's
combined salary reduction-type retirement savings
contributions during a calendar year.
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Does an employee have the right
to terminate a salary reduction agreement outside of a
SIMPLE plan's normal election period?
Yes, an employee may terminate the
agreement at any time. However, a SIMPLE plan may
provide that an employee who ends a salary reduction
agreement at times other than those specified is not
eligible to resume participation again until the next
calendar year.
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How can employers make
fixed-amount contributions instead of matching
contributions?
Employers can make fixed-amount
contributions equal to 2 percent of each eligible
employee's pay by notifying eligible employees, within
a reasonable time before the 60-day election period,
that the 2 percent fixed-amount contribution will be
made.
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When must an employer deposit
employee contributions under a SIMPLE plan that
involves SIMPLE IRAs?
An employer must forward employee
contributions to the financial institution as soon as
they can reasonably be segregated from the employer's
general assets, but in no event later than 30 days
following the month in which they were withheld from
the employee's paycheck.
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When must an employer make
matching and fixed-amount contributions under a SIMPLE
plan that involves SIMPLE IRAs?
An employer's contribution must be
made to the selected financial institution no later
than the due date for filing the employer's tax return
(including extensions) for the employer's tax year for
which the contribution was made.
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What if money is withdrawn from
a SIMPLE IRA before an employee turns age 59½?
Generally, employees who withdraw
funds before age 59½ may have to pay a 10 percent tax
on any withdrawals, in addition to any regular income
tax. However, if the withdrawal occurs during the
employee's first 2 years of participation, the
additional tax is increased to 25 percent.
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The following resources may be useful in
learning more about SIMPLE plans or retirement plans in
general:
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Internal Revenue Service Form
5304-SIMPLE or Form 5305-SIMPLE, both include a model plan
document, notice and salary reduction agreement
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IRS publication 560, Retirement Plans
for the Self-Employed
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IRS Publication 590, Individual
Retirement Arrangements (IRAs)
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IRS forms are available from IRS field
offices and on the Internal
Revenue Service web site.
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If you have further questions about the
information in this publication, please write:
U.S. Department of Labor
Employee Benefits Security Administration
200 Constitution Ave., NW,
Room N-5625
Washington, DC 20210
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The following pamphlet and other
pension-related publications are available from the Employee Benefits Security Administration:
This and other pension-related publications
are also available by calling EBSA's Toll-Free Employee &
Employer Hotline at: 1.866.444.EBSA (3272).
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This publication has been developed jointly
by the U.S. Department of Labor/Employee Benefits Security Administration and the Department of Treasury/Internal Revenue
Service.
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This material will be made available to
sensory impaired individuals upon request:
Voice phone: 202.219.8776,
TDD phone: 1.800.326.2577
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This booklet constitutes a small entity
compliance guide for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996.
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