WHO MAY ESTABLISH A SIMPLE IRA PLAN?
SIMPLE plans can be adopted by employers who, for the prior calendar year, employed no more than 100 employees, each of whom received at least $5,000 in compensation from the employer. A SIMPLE IRA may be established by a corporation, rural electric cooperative, partnership, sole proprietor, tax-exempt organization and Indian tribal government. Units of government may have a SIMPLE IRA provided the 100-employee test is passed.

An eligible employer, who maintains a SIMPLE plan for 1 or more years, but who increases to over 100 employees in a subsequent year, is given a two-year grace period before the employer is required to terminate the SIMPLE plan. Thus, if during the two year grace period the number of employees becomes less than 100, the employer may continue the SIMPLE IRA.

Elective deferral cost of living adjustment increases after 2005 will be in increments of $500.
Catch-up contributions for participants age 50 and older may be made in the following amounts:

Exclusive Plan Rule
The SIMPLE IRA must be the only qualified retirement plan that an employer maintains during a calendar year.

The SIMPLE plan must be the only qualified plan maintained by the employer (or predecessor employer) during the period beginning with the effective date of the SIMPLE plan and ending with the year the determination is being made. If no contributions are made and no benefits accrue to an existing qualified plan of the employer during this time period, the employer will satisfy the requirement.

Definition of Compensation
For purposes of the rules relating to IRA SIMPLE plans, “compensation” means compensation from the employer or a related employer required to be reported on Form W-2, plus any elective deferrals of the employee. [See Internal Revenue Code §6051(a)(3) & (a)(8).] In the case of a self-employed individual, compensation means net earnings from self-employment.

The IRA SIMPLE plan, compensation limit under Code §401(a)(17) only applies to the 2% nonelective contribution, described in V.B.2.below. The 401(a)(17) compensation cap does not apply to the matching contributions, described in XI.B. below.

Excludable Employees
The following classifications of employees may be excluded:

• Employees who are part of a collective bargaining unit if retirement benefits have been the subject of good faith bargaining; and/or
  
• Nonresident aliens with no taxable income from U.S. sources.

MHCO Comment
Since these are the only classifications of employees that may be excluded, the IRA SIMPLE will automatically satisfy the coverage requirements under Code §410(b), and no coverage testing is required.

Employee Contributions
Employee pre-tax contributions are generally made by means of payroll withholding. The employee may elect under a qualified salary reduction arrangement to contribute a percentage of his or her compensation to the SIMPLE plan, up to the elective deferral limit in effect for the calendar year - $10,500 for 2008 and $11,500 for 2009.

A “qualified salary reduction arrangement” is a written agreement between an eligible employer and an employee eligible to participate in the SIMPLE plan under which the employee elects to have the employer make payments as pre-tax elective contributions to a SIMPLE plan on behalf of the employee or to the employee directly in cash.

Matching Contribution
The employer must match participant deferrals on a dollar-for-dollar basis up to 3% of compensation.

Special election: The employer may elect to match deferrals dollar-for-dollar on a lower percentage of compensation (not less than 1% of compensation) for any year, upon reasonable notice to eligible employees. However, the election may not result in the percentage being less than 3% of compensation in more than 2 out of any 5 years. If the employer makes this election for any calendar year, the employer must notify employees of the election within a reasonable period before the 60th day preceding the beginning of such year.
MHCO Comment:
SIMPLE IRA matching = Dollar for dollar match of 3% in 3 of 5 years; for 2 out of 5 years the match may be as low as 1%.

Deductibility of Employer Contributions
Employer matching contributions are deductible in the taxable year of the employer with or within which the calendar year for which the contributions were made ends. The employer is allowed a deduction for a year only if contributions are made by the due date, plus extensions, for filing the employer's tax return for that year.

Example: Assume that a corporation sponsors an IRA SIMPLE plan. The employer's fiscal year ends on March 31 st and the employer does not have any tax filing extensions. The plan year is the calendar year. The employer can only take a deduction in the fiscal year ending March 31, 2003 for the amount of employer contributions relating to compensation earned during the fiscal year.

Administrative Requirements for Deferral Arrangements for IRA SIMPLE
An employee elects the amount that he or she will defer into an IRA SIMPLE in a qualified salary reduction arrangement filed with the employer. Each employee eligible to participate may elect to participate in the salary reduction arrangement or to change his or her deferral percentage during the 60-day period before the beginning of any calendar year (and the 60-day period before the first day such employee is eligible to participate).

An employee may elect to stop participating in the arrangement at any time during the year. The SIMPLE plan may include a provision that if the employee terminates participation, such employee may not elect to resume participation until the beginning of the next year.

Compared to a qualified plan, the reporting requirements for a SIMPLE IRA are indeed simplified.

The trustee must provide a summary description containing the following information to the employer each year:

• the name and address of the employer and trustee;
  
• the requirements for eligibility for participation in the SIMPLE plan;
  
• the benefits provided with respect to the SIMPLE plan;
  
• the time and method of making elections with respect to the SIMPLE plan; and
  
• the procedures for, and effects of, withdrawals (including rollovers) from the plan.
  
• if there is a DFI(see X below), the procedures for requesting a penalty- free transfer
  

Notice Requirement
The employer must notify each employee immediately before the 60-day period preceding the start of a plan year of the employee's opportunity to make an election to participate in the plan or to change his or her deferral amount. This notice must include a copy of the summary description above.

As the SIMPLE IRA contribution is placed in the participant's own IRA, the IRA Trustee/Custodian/Issuer is responsible for the IRA reporting requirements such as the IRS Form 5498, 1099R, and the annual statement:

Statement
Within 31 days after the close of each calendar year, the trustee/custodian/issuer of the individual's IRA is required to provide to each participant an account statement showing the account balance as of the close of the calendar year and the account activity during the calendar year.
70½ Notice
As of the 2003 year, the trustee is required to provide a notice to all IRA accountholders who are age 70 ½ or older advising them of the need to take a required minimum distribution from the IRA and either providing the amount of that required minimum distribution or a information for obtaining the minimum distribution amount.
Form 5498
The trustee of the individual's IRA is also required to file a 5498 annual report with the IRS for an IRA based SIMPLE by May 31 following each calendar year.

Example 1. If a SIMPLE IRA plan employee has a compensation of $300,000, a 3% match would enable a match of 3% times $300,000 for a matching contribution amount of $9,000 in 2004. The matching contribution would be in addition to the HCE making the maximum elective deferral to the SIMPLE IRA of $9,000. The elective deferral amount is based on the employee's choice of the percentage to be deferred.

Example 2. Assuming that it is the same scenario as example 1, except that the SIMPLE IRA plan employee has a compensation of $250,000; then the 3% match be based on the amount of compensation. Specifically, the matching contribution would be 3% times $250,000 for a matching contribution amount of $7.500. So although the employee would still be able to contribute elective deferrals of $9,000, the matching contribution would only be $7,500 based on the 3% of compensation matching contribution formula.