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Tutorial:SIMPLE IRA Notification and Administrative Requirements

The Notification and Administrative requirements that apply when establishing and maintaining a SIMPLE IRA plan.
 
SIMPLE IRA Notification and Administrative Requirements
The employer and the financial institution must satisfy certain notification and administrative requirements in order for the SIMPLE IRA to remain in compliance with regulatory requirements. Failure to meet these requirements can result in fines and penalties being assessed to the guilty party.
Employer Notification Requirements
Employee’s Salary Deferral Opportunity
The employer must provide a written notification to each employee of the opportunity they have to make salary deferral contributions to the SIMPLE IRA Plan, or modify an agreement they already have in place. This notification must be provided before the employee’s 60-day election period. See Employee Elections below for information about the 60-day election period.
Option to Select Financial Institution
  • If the employer uses the IRS Model Form 5304-SIMPLE, employees must be notified on their eligibility to choose the financial institution with which they want to maintain their SIMPLE IRAs, which is the financial institution to which their employer would be required to send their SIMPLE IRA contributions. The employer may use the use the Model Notification to Eligible Employees on page 3 of the Form 5304- SIMPLE for this purpose.

 

 
The financial institution would serve as the custodian/trustee of the employee’s SIMPLE IRA.
The employer must include the summary description described under Trustee Notification Requirements below in the notification to the employees.
 
 
The employee is required to provide the employer with the name of the financial institution that he wants to serve as trustee, and provide any financial information that is necessary to facilitate the transmittal of the contribution to the financial institution. Employees should check with their financial institution to determine what financial information should be included with the transmittal to ensure the amount sis properly allocated to the participant’s SIMPLE IRA. At a minimum, the transmittal should include the participant’s name, account number and the type/s of contribution included- that is whether the amount remitted includes salary deferral contributions and/or employer matching or nonelective contribution and the dollar amount to apply to each category. The employee may use the Model Salary Reduction Agreement included in Form 5304-SIMPLE can be used for this purpose.
 

 

  

  • If the employer uses the IRS Model Form 5305-SIMPLE, employees must be notified that they are required to establish their SIMPLE IRAs with the designated financial institution (DFI), and the circumstances under which the can transfer or rollover their SIMPLE IRA contributions to another financial institution. The notification should include an explanation of if and when fees would be applied to transfers to other financial institutions that are completed as per the employee’s request.
Change or Reduction in Contributions
  • If the employer chooses to reduce the matching contribution to an amount that is less than 3 %, or to make a 2% nonelective contribution instead of the 3 % matching contribution, he must notify employees of this change within a reasonable time period before the 60-day election period. This notification can be provided at the same time as the notification of the employee’s opportunity to enter into a salary deferral agreement and the summary description is provided to the employees.  In general, this notification requirement is satisfied if it is provided immediately before the 60-day election period.

 

Penalties for Failing to Provide Notices
If the employer fails to provide the required notifications, he will be liable for a penalty of $50 per day until the notices are provided. An exception applies if the employer shows that the failure was due to reasonable cause, in which case the penalty would not be imposed. For instance, if the employer provides the employees with information about their right to choose a financial institution, but fails to include the about the trustees name, address and withdrawal procedures because the information is not available at the time the employer is required to provide the summary description, the employer is considered to have shown reasonable cause for failure to provide the information , but only if the employer sees to it that this information is provided to the employee as soon as administratively feasible once the trustee has been selected.
Trustee Notification Requirements
The financial institution that is serving as trustee or custodian of a SIMPLE IRA is required to provide information to the (a) employer, (b) SIMPLE IRA participants for which it serves as trustee/custodian of their SIMPLE IRAs and (c) the IRS.
(a) Notification to Employers
The financial institution must provide the employer that sponsors the SIMPLE IRA Plan with a summary description on an annual basis. The summary description must include the following information:
(a) The name and address of the employer and the financial institution
(b) The requirements that the individual must meet in order to be eligible to participate in the SIMPLE IRA Plan
(c) The benefits provided with respect to the SIMPLE IRA
(d) The time and method of making employee elections for salary deferral contributions
(e) The procedures for, and effects of, withdrawals (including rollovers) from the SIMPLE IRA
 
This summary description must be provided to the employer early enough so that the employer can in turn meets its notification requirements to its employees. However, an exception is made if the financial institution has not yet agreed to serve as trustee/custodian of the SIMPLE IRA. In such case, the financial institution must provide the summary description to the employer as soon as administratively feasible after agreeing to serve as custodian/trustee of the SIMPLE IRA.
 
Penalties for Failing to Provide Summary Descriptions
If the trustee/custodian fails to provide the employer with one or more summary, a $50 penalty would be incurred for day that the failure continues[1], unless the trustee/custodian shows that the failures are due to reasonable cause.  If the employer or the trustee/custodian provides the employee with the information listed above from (a) through (e) before the 60-day election period,   the trustee/custodian of that SIMPLE IRA is considered to have shown reasonable cause for failure to provide that information to the employer. For example, if  an employer who uses a DFI provides all eligible employees in the SIMPLE IRA Plan with  its name and address, the information described in (a) through (d) above, and the effects of withdrawals;  and the trustee/custodian provides its name and address and its procedures for withdrawal to each eligible employee for whom a SIMPLE IRA is established with the trustee/custodian under the SIMPLE IRA Plan, the trustee/custodian will be deemed to have shown reasonable cause for failing to provide the employer the information described in (a) through (e) above.
 
Use of Model Forms as Summary Description
If the employer uses the IRS Model Form 5304-SIMPLE or the Form 5305-SIMPLE, the financial institution a trustee may satisfy the requirement for providing the summary description to the employer by providing the employer (and/or the employee in the case of Form 5304-SIMPLE) with a current copy of Form 5304-SIMPLE or Form 5305-SIMPLE whichever is applicable, the accompanying instructions, the information about the procedures for withdrawals , and the name and address of the financial institution. The financial institution should provide guidance to the employer (and the employee, if Form 5304-SIMPLE is provided directly to the employee) about the need for the employer to complete the first two pages of Form 5304-SIMPLE or Form 5305-SIMPLE in accordance with its plan's terms and to distribute completed copies to eligible employees
 
Exception for ‘Transfer SIMPLE IRAs’
If the SIMPLE IRA is a ‘transfer SIMPLE IRA’, the financial institution is not required to provide the summary description. A SIMPLE IRA is considered to be a transfer SIMPLE IRA, if the no SIMPLE contributions were made to the account. For instance, if the account was funded only with transfers and rollovers from other SIMPLE IRAs, and did not receive any salary deferral or employer matching or nonelective contributions, it would be considered a ‘transfer SIMPLE IRA’.
 
(b) Notification to participants
The financial institution must provide each participant for whom it maintains a SIMPLE IRA with a statement of the participant’s account. This must be provided 31 days (by January 31) after the close of each calendar year, and must include the account activity that occurred during that calendar year and the account balance as of the close of the calendar year. If the financial institution does not satisfy this requirement, they will incur a $50 penalty for each day the failure continues, unless they can show that the failure is due to a reasonable cause.
 
In addition to the account statement, the financial institution is required to provide participants with a disclosure statement and a copy of the SIMPLE IRA Plan agreement. The disclosure statement contains an explanation of the rules that governs the SIMPLE IRA, in nontechnical non-legalese terms and could include items such as:
 
  • The right of the participant to revoke the SIMPLE IRA, the procedures for revoking the SIMPLE IRA and the deadline by which the revocation must occur  if being requested
  • Any special requirements that apply to SIMPLE IRAs held with the financial institution, such as the rules regarding investment decisions for the account, the rules regarding designating a beneficiary for the account and the rules for requesting withdrawals from the SIMPLE IRA
  • The requirements that the account must satisfy in order to be a ‘SIMPLE IRA’. This includes contribution limits, required minimum distribution rules, investment restrictions, distributions by beneficiaries, and the requirement that the SIMPLE IRA assets not be commingled with other property
  • The income tax consequence of establishing and contributing to a SIMPLE IRA. This includes tax credits for contributions, the nondeductibility of SIMPLE IRA contributions, tax-deferral treatment of contributions and earnings, and rollover/transfer rules
  • Federal tax penalties that can apply to the SIMPLE IRA asset and the circumstances under which they can apply
  • Fees and expenses that may apply to the account , and
  • Financial information, such as how the growth in value of the account is determined
 
The details of the financial disclosure will depend on the type of account. For instance, if the SIMPLE IRA is a brokerage account, the information may simply state that the growth of the value of the account may depend on the performance of investments chosen by the participant. On the other hand, where the projection of the financial growth can be reasonable ascertained, the financial institution is required to provide the participant with the projection, as well as any penalties that could result from making withdrawals from the account. One example is a certificate of deposit (CD) SIMPLE IRA[2].         
 
(c) Notification to the IRS
The financial institution is required to provide several notifications to the IRS about the SIMPLE IRA. These are as follows:
 
Distribution Notifications:The financial institution must report distributions that are made from the SIMPLE IRA on IRS Form 1099-R. Distributions must be reported even if they are later rolled-over to another SIMPLE IRA or other eligible retirement plan. The reporting requirements for distributions from a SIMPLE IRA as the same as the reporting requirements for a distribution from a traditional IRA, except in cases where the two-year requirement was not met when the distribution occurred. In such cases, the financial institution is required to indicate on Form 1099-R that the distribution was taken before the end of the two-year period, which alerts the IRS that the amount is subject to a 25% early distribution penalty, and not the 10% penalty that would apply had the distribution occurred after the two year period.
 
Contribution Notification:
If a contribution is made to the SIMPLE IRA during a year, the financial institution is required to report the contribution on IRS Form 5498. For this purpose, contributions include salary deferral contributions, employer matching or nonelective contributions, and rollover contributions. Contributions are reported on Form 5498 for the year they are received, which may be different from the year for which they are contributed.
 
Example:
Employer B made matching contributions to its SIMPLE IRA Plan for 2008 in March of 2009. This is permissible, as employer contributions can be by the employer’s tax filing deadline, including extensions. Custodian ABC deposited the contributions with a trailer to note that the amount was received in 2009 for 2008. Note: Not all financial institutions have the capability to add trailers or other bookmarks. Adding a trailer is an added service and not a regulatory requirement. For tax reporting purposes, Custodian ABC will report the contribution to the IRS as a contribution for 2009. This is consistent with the IRS’ tax reporting requirements for SEP IRAs and SIMPLE IRAs. Under this requirement, SEP IRA and SIMPLE   IRA contributions are reported for the year they are received by the financial institution, regardless of the year for which they are made by the employer or employee.
 
Required Minimum Reporting (RMD) Requirements
The RMD reporting requirements applies to both the IRS and the participants. Under these requirements; the financial institution is required to do the following:
 
  • Perform Required Reporting to the SIMPLE IRA Owner
If the participant is required to take a RMD for the year, and is alive at the beginning of the year, the financial institution that held the SIMPLE IRA as of December 31 of the prior year must provide a statement to the participant by January 31 of the calendar year regarding the RMD. The financial institution may chose from one of two alternatives for satisfying this requirement.
 
§ Alternative one. The financial institution provides the participant with a statement of the amount of the RMD and the date by which the RMD amount must be withdrawn from the SIMPLE IRA. The amount is permitted to be calculated assuming that the sole beneficiary of the SIMPLE IRA is not a spouse more than 10 years younger than the participant and that no amounts received by the SIMPLE IRA after December 31 of the prior year are required to be taken into account to adjust the value of the SIMPLE IRA as of December 31 of the prior year for purposes of determining the RMD.
§ Alternative two. The financial institution provides the participant with a statement: (1) informs the participant that an RMD amounts is required to be withdrawn from the SIMPLE IRA for calendar year and the date by which the amount must be distributed and (2) includes an offer to furnish the participant with a calculation of the RMD amount upon request. If the participant requests the calculation, the financial institution must calculate the RMD and report that amount to the participant.
 
Under both alternatives, the statement must also inform the participant that the financial institution will be reporting to the IRS that the participant is required to receive a RMD for the calendar year. The statement can be provided to the participant owner in conjunction with the statement of the fair market value of the SIMPLE IRA as of December 31 of the prior year that is otherwise required to be provided to the IRA owner by January 31 of a year.
 
  • Perform Required Reporting to the IRS
In an RMD amount is required to be withdrawn from the SIMPLE IRA for the year, the financial institution must indicate that the SIMPLE IRA is subject to the RMD requirement for the year on IRS Form 5498 for the immediately preceding year. For instance, a 2008 Form 5498 for a 2009 RMD, providing the information is consistent with the requirements s provided in the instructions for Form 5498. The notification is not required to include the RMD amount. 
 
This reporting requirement does not apply to inherited SIMPLE IRAs.
 
Participant Need not Take RMD from SIMPLE IRA
Under the RMD rules that applies to traditional IRAs, SIMPLE IRAs and SEP IRAs, an individual who is required to withdraw RMD amounts for the year need not make the withdrawals from each IRA. Instead, the individual can calculate the RMD for each of the IRAs, then withdraw the aggregate amount from one or more of the IRAs. Therefore, the participant who receives the RMD notification from the trustee can choose to either take the RMD from the SIMPLE IRA, or take the RMD from any of his other SIMPLE IRA, traditional IRA, or SEP IRA.
 
SIMPLE IRA Employee Elections
An employee must be given the right to enter into an agreement to make salary deferral contributions to his employer’s SIMPLE IRA Plan, or to change an existing salary deferral 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. When making modifications to an existing salary deferral agreement, the employee can either reduce the amount- including reducing the amount to zero, or increase the amount. This 60-day period generally applies to a SIMPLE IRA that is already in existence and is being continued for the next year, but can apply to one that is being established during the current year for the next year.
For a SIMPLE IRA that is being establish in the current year for the current year, the 60-day period includes either the date the employee becomes eligible or the day before that date.
Example:
Company B establishes a SIMPLE IRA Plan effective as of July 1, 2008. Each eligible employee becomes eligible to make salary deferral contributions on July 1, 2008. The e 60-day period must begin no later than May 2, 2008 and cannot end before July 1, 2008.
It is possible that the employer began discussions about the plan on July 1, and therefore would not have been able to provide the notice to the employees before then. In such a case, if the employer provides the summary description to the employees on July 1 and the 60-day period would begin on July 2 and end September 1.
During a year when an employee becomes eligible to participate in the SIMPLE IRA Plan, he must be allowed to start making salary deferral contributions to the plan upon becoming eligible, even if the 60-day period has already ended.
Employee May Modify Election during 60-Day Period
The employer cannot limit the frequency with which employees can change their salary deferral election during the 60-day period. As such, an employee can make as many changes as he likes (during that period).
Employer Can Extend 60-day Period
An employer can choose to extend the 60-day period if he so wishes. For instance, he can extend it to 90-days, allowing the employees more time within which to make up their minds about making salary deferral contributions to the plan. Additionally, the employer can provide quarterly election periods during the 30-days before each quarter begins.
Employee May Terminate Salary Deferral Agreement
An employee need not wait until the election period to terminate a salary deferral agreement, and can instead choose to discontinue salary deferral contributions to the plan at anytime during the year. However, the employer can prevent an employee from resuming salary deferral contributions to the plan until the next year, if the employee terminates his salary deferral agreement outside of the election periods.


[1] Code § 6693(c)
[2] Revenue Ruling 86-78 ( see appendix)

 

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