Top 10 Questions about SIMPLE IRAs

August 24, 2017 3:25 PM
By Brian Dobbis

As the deadline approaches for small businesses to establish SIMPLE IRAs in 2017, here are answers to frequently asked questions.


SIMPLE IRAs are low-cost, hassle-free retirement plans for small-business owners who have fewer than 100 employees, and who don’t sponsor any other qualified retirement plans. With the 2017 deadline for setting up a SIMPLE plan approaching, I thought I’d share information requested most often by financial advisors.

Q: When is the deadline for establishing a SIMPLE IRA effective for 2017?
 An employer has until October 1, 2017, to set up a plan effective for 2017. A plan established after that date would be effective January 1, 2018. (For more on SIMPLE timing, click here.)

Q: Can all employers establish a SIMPLE IRA?
 No. Qualifying employers must meet certain criteria, such as having 100 or fewer workers who received $5,000 or more in compensation in the prior year. Once the account is established, the employer then is required to satisfy the staffing-level rule in each year the plan is maintained. As long as those conditions are met, any type of employer—including corporations, limited liability companies, nonprofits, self-employed, or sole proprietorships—can establish SIMPLE IRAs.

Tip: There is a grace period for employers who subsequently fail to satisfy the 100-employee limit. An employer that maintains a SIMPLE plan for at least one year and, subsequently, ceases to satisfy the 100-employee limit in a later year, will be treated as though the employer had met the requirement for the two calendar years immediately following the calendar year for which the limit was last met.

Q. Can an employer sponsor another retirement plan in the same year as a SIMPLE?
No. This is known as “exclusive plan rule.” A SIMPLE plan must be the only qualified plan maintained by the employer.

Tip: This rule does not affect IRA eligibility.  Eligible employees can contribute up to the maximum annual limit to their traditional or Roth IRAs, in addition to SIMPLE participation.

Q: Can employees roll over assets from their former employers’ 401(k) plans into SIMPLE IRAs?
Yes. Recent legislation loosened SIMPLE IRA rollover rules. (See here for details.)  

Q:  When can employees make withdrawals from their SIMPLE IRAs?
At any time, but they should proceed with caution. Any withdrawals before age 59½ are subject to a 25% penalty during the first two years of participation in a SIMPLE IRA. For example, converting SIMPLE assets to a Roth IRA or rolling assets to a 401(k) plan within the first two years will subject an employee to the 25% penalty. After two years, the penalty would be reduced to 10%.

Tip: The two-year rule does not apply to SIMPLE-to-SIMPLE transfers. In other words, employees can transfer their SIMPLE accounts directly to a new SIMPLE IRA provider at any time, without incurring taxes or penalties.

Q: Are SIMPLE plans required to file IRS Form 5500?
No. Form 5500 is intended to satisfy annual reporting requirements for ERISA-covered qualified plans, such as 401(k)s. SIMPLE plans generally are not subject to ERISA (Employee Retirement Income Security Act), so these filings are not required.

Q: Is the employer required to make an annual contribution on behalf of employees?
Yes. The employer has two options available satisfying this requirement: 1) fully vested, dollar-for-dollar matching contributions up to 3% of employees’ compensation, or 2) fully vested, non-elective contributions of 2% of each employee’s compensation. A maximum of $265,000 of each employee’s compensation can be taken into account to assess the contribution limit in 2015.

Tip: An employer has the ability to reduce the matching contribution to less than 3%, but not less than 1%, in two out of any five years.

Q: Can an employer make additional contributions?
No. SIMPLE contributions are limited to 1) a rollover from another eligible employer plan, 2) employee salary deferrals plus an employer match, or 3) non-elective contributions from the employer. No additional contributions are permitted.

Q: What correction methods are available if a mistake was made operating a SIMPLE plan?
The IRS has a number of resources available to assist you in correcting plan errors (as detailed here). We urge you to discuss any plan issues with a financial professional and/or a tax professional.

Tip: “Keep it simple” generally is good advice. For more information on these retirement savings vehicles, refer to my SIMPLE blogs posted in the last two weeks, and stay tuned for more in the weeks ahead. Feel free to ask questions or share your insights in the comment section.

Q:  How do employers set up a Lord Abbett SIMPLE IRA?
 The plan setup process is straightforward:  Employers can simply follow the steps outlined in our SIMPLE IRA Plan Sponsor Guide or contact 888-522-2388.

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