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March 2, 2009

Tutorial: Which Employees are Eligible to Participate in a SIMPLE IRA


Which Employees can Participate in a SIMPLE IRA

An employer can allow all of its employees to participate in its SIMPLE IRA Plan. However, if employer prefers to exclude some employees, that is permissible. For an employer that wants to exclude some employees, care must be taken to ensure that the following employees are included:
Non-excludable employees: Employees who received at least $5,000 in compensation during any two preceding years and is reasonably expected to receive at least $5,000 in compensation during the current calendar year.
It is important to note that the two year period is ‘any two’ preceding years. Therefore, these years need not be consecutive. As the current year compensation requirement is ‘reasonably expected to receive’. Let’s take a look at two examples.
Example 1: Company BC maintained a SIMPLE IRA plan and included only non-excludable employees.
Employee AB worked for Company BC on a part-time basis because he was attending college. His hours fluctuated, as he took a different number of courses each year. He completed college in December of 2007 and was moved to the status of full time employee in January 2008. Full time employees receive a compensation of $28,000 per year.
$28,000 ( reasonably expected to earn)
Company BC must include Employee AB for the 2008 plan year; because he received at least $5,000 in compensation in 2002 and 2007, and he is reasonably expected to receive at least $5,000 in 2008.
Example 2: The facts are the same as in example 1, except that Employee AB accepted a job offer from another company in February 2008. By then, he had received only $4,600 in compensation. Company BC must still include him in the plan for 2008 even though he did not receive at least $5,000 in compensation, because he was ‘reasonably expected’ to receive at least $5,000 for the year.
Leased Employees
The leased employee rules apply to SIMPLE IRAs. Therefore, leased employees must be covered under the SIMPLE IRA if they are required to be treated as if they are ‘employees’ of the employer for plan purposes, and they meet the plan’s eligibility requirements.  If the leasing organization covers the leased employee under a ‘safe harbor plan’, the employee should not be covered under the employer’s SIMPLE IRA Plan. A safe harbor plan is defined as a money purchase pension plan that meets the following requirements:
              I.Has a nonintegrated employer contribution rate for each participant of at least 10 percent of compensation,
            II.Provides for full and immediate vesting, and
           III.Each employee of the leasing organization (other than employees who perform substantially all of their services for the leasing organization) immediately participates in the plan.
# (iii) does not apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000.
Employers that use the services of leased employees should consider consulting with a retirement plans consultant or ERISA attorney to determine if the leased employees should be covered under the plan.
Reducing Eligibility Requirements
An employer can reduce the eligibility requirements so as to allow more employees to participate in the plan. For instance, the employer may reduce  either ( or both) of the $5,000 requirement to any amount less than $5,000, and reduce the two-preceding year requirement to any number of years less than two.
Excludable Employees
In addition to employees who do not meet the compensation requirements, employers can exclude the following employees:
  1. Employees who covered under a  collective bargaining agreement (unionized employees);
  2. In the case of a trust established or maintained pursuant to an agreement that the Secretary of Labor finds to be a collective bargaining agreement between air pilots represented in accordance with Title II of the Railway Labor Act and one or more employees, all employees not covered by that agreement;
  3. Employees who are nonresident aliens and who received no earned income from the employer that constitutes income from sources within the United States, and 
  4. During the calendar year in which an acquisition, disposition or similar transaction occurs (or the following calendar year), an employer may exclude from eligibility all of the employees who would not have been eligible if the transaction had not occurred.[1]
Business owners should take to ensure that they do not unintentionally exclude themselves from the plan when establishing the eligibility criteria. For instance, an owner of a Corporation that pays himself wages of only $2,000 per year would not be eligible to participate in the plan if the compensation requirements are $5,000 or more.


[1] IRC § 408(p)(4)(b)

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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