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Tutorial: Which Employers are Eligble to Establish a SIMPLE IRA

The requirements that businesses must meet in order to establish and maintain a SIMPLE IRA
 
Which Employers can Establish a SIMPLE IRA
 
Any employer can establish a SIMPLE IRA for his business and his employees, providing the employer meets the following requirements;
 
  • The employer had no more than 100-employees who earned $5,000 or more in compensation during the preceding year. This is referred to as the 100-employee limitation.  And,
  • The SIMPLE IRA is the only plan maintained by the employer. This is referred to as the exclusive plan rule.
 
Eligible types of businesses are:
 
§ Sole proprietorships,
§ Partnerships,
§ S-Corporations,
§ C-Corporations,
§ Limited liability corporations,
§ Limited liability partnerships,
§ Tax-exempt employers, and
§ Governmental entities[1].
 
100-Employee Limitation Rule
Under the 100-employee limitation rule, the following applies:
-        Any employee that is employed during the calendar year must be counted, regardless of whether they are eligible to participate in the plan
-        Employees include self-employed individuals who received earned-income from the business     
-        If an employer that used to meet the 100-employee limitation no longer does, a two-year grace period is allowed. For instance, if the employer no longer meets the 100-employee limitation requirement in 2008, he may still continue to maintain the SIMPLE for 2009 and 2010.
 
Example:
Company A adopted a SIMPLE IRA in 2004 and continued to maintain the SIMPLE IRA since then. From 2004 through to 2007, Company A had 150 employees, but only 90 of the employees earned at least $5,000 during each preceding year. As business improved, so did the salary of the employees, resulting in 105 employees earnings at least $5,000 during 2008. This means that Company A exceeded the 100-employee limitation for the 2008 plan year, as more than 100-employees earned at least $5,000 during the preceding calendar year. However, Company A has a grace period of 2-years and can continue to maintain the plan for 2009 and 2010.
 
-        If the 100-employee limitation is not met as a result of a merger or acquisition, the employer has a two-year grace period. For instance, if as a result of a merger the employer exceeds the 100-employee limitation in 2008, the employer may continue to maintain the plan for 2009 and 2010.
 
 
Exclusive Plan Rule
Under the exclusive plan rule, an employer is not eligible to maintain a SIMPLE IRA if any of the following applies:
  • Any employee of the employer receives any contribution under a defined contribution plan maintained by the employer or a predecessor employer, for any plan year beginning or ending in the calendar year for which the SIMPLE IRA is maintained
  • Any employee of the employer has an increase in a benefit accrued or treated as an accrued benefit under a defined benefit plan , for any plan year beginning or ending in the calendar year for which the SIMPLE IRA is maintained[2]
 
For this purpose, contributions do not include transfers or rollovers. Forfeitures are also disregarded, unless the forfeiture replace otherwise required contributions.
 
Other Plans Defined
 
When determining whether employees receive contributions or benefits under another plan, the following plans are included: 
  1. Qualified plans, including profit sharing, money purchase pension, 401(k) and , defined benefit plans
  2. A qualified annuity under section 403(a),
  3. A 403(b) annuity
  4. A 403(b) custodial account
  5. A plan established for employees of a State, a political subdivision or by an agency or instrumentality of any State or political subdivision (other than an eligible deferred compensation plan described in section 457(b)),
  6. A simplified employee pension (“SEP”) IRA ,
  7. A trust described in section 501(c)(18) [3], and
  8. A SIMPLE IRA
 
If an employee receives contributions or benefits under any of these plans for any plan year beginning or ending in the calendar year for which the SIMPLE IRA is maintained, the employer is not eligible to maintain a SIMPLE IRA, unless an exception applies.
 
Exceptions to Exclusive Plan Rule
An employer may still maintain a SIMPLE IRA if it does not satisfy the exclusive plan rule under the following circumstances:
(1) The other plan maintained by the employer covers only employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining and the SIMPLE IRA Plan excludes these employees.
(2) The other plan is maintained by the employer during the calendar year in which an acquisition, disposition or similar transaction occurs (or the following calendar year); and the exclusive plan rule would have been satisfied had it not been for the acquisition or similar transaction.
 
If the employer violates the exclusive plan rule, contributions to the SIMPLE IRA for the year that the violation occurs are treated as excess contributions.
 
 
Controlled Group and Affiliated Service Group Rules Apply
 
For the purpose of defining who the ‘employer’ is, the controlled group and affiliated service group (ASG) rules apply[4]. If an employer is part of a controlled group or ASG, the employees of the other business must be converted under the SIMPLE IRA and must be counted for purposes of the 100-employee limitation. The following example was provided by the IRS:
 
Example:
Individual P owns Business A, a computer rental agency that has 80 employees who received more than $5,000 in compensation in 2008.
Individual P also owns Business B, which repairs computers and has 60 employees who received more than $5,000 in compensation in 2008.
Individual P is the sole proprietor of both businesses.
Section 414(c) provides that the employees of partnerships and sole proprietorships that are under common control are treated as employees of a single employer. Thus, for purposes of the SIMPLE IRA Plan rules, all 140 employees are treated as employed by Individual P. Therefore, neither Business A nor Business B is eligible to establish a SIMPLE IRA Plan for 1997.
 
 
The controlled group or ASG rules are highly complex and are beyond the scope of this material. Situations where such relationships can exist may include the following:
 
-        The business owner/s has  ownership in more than one business
-        The/A business owner is married to someone who has ownership in another business
-        The business owner(s) has/have children or parents who has ownership in another business. Certain age limits apply
-        If the business has a service relationship and, in some cases, an ownership relationship, with another business
 
 
An employer who is unsure of whether his business is part of a controlled group or ASG must consult with an ERISA attorney or other expert that is proficient in the area of ERISA


[1] IRS Notice 98-4
[2] IRC § 408(p)(2)(D)
[3] IRC § (g)(5); IRC § 408(p)(2)(D)
[4] IRC § 414(b), IRS Notice 98-4