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March 1, 2009

Tutorial: Introduction to SIMPLE IRAs



The savings incentive match plan for employees of small employers (SIMPLE) IRA plan was established under the Section 1421 of the Small Business Job Protection Act of 1996, Pub. L. 104-188 (“SBJPA”), effective for tax years beginning January 1, 1997. As this coincided with the date employers could no longer establish salary reduction SEP (SAR-SEP) plans, it is a common belief that SIMPLE IRAs replaced SAR-SEP plans. However, there is nothing in the tax code that confirms or denies that belief, and it could be just a coincidence. Additional guidance was later provided in the Technical corrections made by the Taxpayer Relief Act of 1997, Pub. L. 105-34 (“TRA 97”).
The SIMPLE IRA is one of the easiest plan to establish and administer, and as such has proven to be a growing favorite among small businesses. However, there are areas that are often overlooked, resulting in non-compliance and could cause disqualification of the plan.
A SIMPLE IRA is an IRA based retirement plan that may be established by small business owners for the benefit of their employees. Business owners who meet the eligibility requirements are also able to participate in the plan.
The term ‘IRA based’ is used, because the funding vehicle for SIMPLE IRA contributions are IRAs. Once the SIMPLER IRA contributions are made to these accounts, they are subject to the traditional IRA rules with a few exceptions which include the following:
1.Distributions made before the participant reaches age 59 ½ are subject to a 25 % penalty, if the distribution is taken before the two-year period has been satisfied. After the two-year period, the penalty is 10 %. See the section on Distributions for details.
2.SIMPLE IRA assets cannot be rolled-over or transferred to another retirement plan, or converted to a Roth IRA unless the two-year period has been satisfied
In addition:
·Regular IRA contributions cannot be made to a SIMPLE IRA; this is unlike a SEP IRA to which traditional IRA contributions can be made. And
·Assets from other plans cannot be rolled over or transferred to a SIMPLE IRA, unless the assets are being rolled-over or transferred from another SIMPLE IRA.
Calendar Year Maintenance Requirement
SIMPLE IRAs must be maintained a calendar year basis. This is especially important to note for employers that operate their business on a calendar year. See the section on Contributions for more information.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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