SIMPLE IRAs are simple part three

Rough Notes, May 2000 by Lesser, Gary S, Clemmer, William A

this article will begin with a discussion of the SIMPLE IRA enrollment periods, employees who are eligible to receive employer contributions, depositing deferrals, selection of a financial institution, restrictions on withdrawals, taxation of distributions, fiduciary concerns, reporting requirements, employer and trustee penalties, deductibility of SIMPLE IRA contributions and IRS-- approved documents. Part One of this article, which appeared in the March issue of Rough Notes, discussed the SIMPLE IRA exclusive plan requirement, structural requirements of the SIMPLE IRA and eligible employers. In the April issue, Part two covered the compensation issues, employee eligibility, employee contributions and the employer election to make a nonelective or alternate matching contribution under a SIMPLE plan in IRA form.

Enrollment period

An eligible employee must be given the right to enter into a salary reduction agreement during the "60-- day period" immediately preceding January 1 of a calendar year (that is, November 2 to December 31 of the preceding calendar year). An eligible employee also must be given the right to enter into a salary reduction agreement for the calendar year or to modify a prior agreement (including reducing the amount to $0 subject to this agreement). However, for the year in which the employee first becomes eligible to make salary reduction contributions, the period during which the employee may enter into a salary reduction agreement or modify a prior agreement is a 60-day period that includes either the date the employee becomes eligible or the day before that date.

Example 1. On November 1, 1999, The Filter Company decides to establish its first retirement plan. It adopts a SIMPLE IRA plan with no service or compensation requirements for its 40 employees. The plan is duly adopted and effective on January 1, 2000. Eligible employees are given a completed summary description, a model notification and a model salary reduction agreement on November 1, 1999. The 60-day period starts on November 2 and ends on December 31, 1999. Here, the 60-- day period includes December 31, the "day before" the date the employee becomes eligible (January 1). Although contributions can be discontinued at any time, no modifications are permitted after the 60-day election period unless the plan provides for additional opportunities to modify (or make) an election to defer compensation.

Example 2. An employer establishes a SIMPLE plan effective July 1, 1999. Each eligible employee becomes eligible to make salary reduction contributions on that date, and the 60-day period must begin no later than July 1 and cannot end before June 30, 1999.

The 60-day election period is the 60-day period before the beginning of any year (and the 60-day period before first becoming eligible to participate). In general, this is the statutory period during which an eligible employee may elect to participate or modify a previous election amount. The employer may allow additional periods for making and changing elections. Thus, for a calendar year, an eligible employee may make or modify a salary reduction election during the 60-day period immediately preceding January 1 of that year. However, for the year in which the employee first becomes eligible to make salary reduction contributions, the period during which the employee may make or modify the election is a 60-day period that includes either the date the employee becomes eligible or the day before. In addition, the plan can provide for additional periods during which an employee may make a salary reduction election or modify a prior election.

During the 60-day period, an employee may modify his/her salary reduction agreements without restrictions. In addition, for the year in which an employee becomes eligible to make salary reduction contributions, he/she must be able to commence these contributions as soon as he/she becomes eligible, regardless of whether the 60-day period has ended.

An employee who commences participation during the election period may cancel or modify a previous election. Any such change is prospective and should be implemented by the employer as soon as possible or in accordance with the documentation submitted to the employer. Nothing precludes a SIMPLE plan from providing additional or longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements.

Employees eligible to receive employer contributions

Employers must make matching contributions for all eligible employees who make elective contributions. An employer may not place any conditions (for example, employment on the last day of the year) on receipt of the match. A matching contribution must be made for a participating eligible employee who has less than $5,000 in compensation for the year. Alternatively, a nonelective contribution must be made for all eligible employees who earn at least $5,000 in compensation for the year. The consequence of an employer's failure to make a required contribution is not known.