Publication 560 - Retirement Plans For Small Business

A savings incentive match plan for employees

How To Set Up a

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Coverage under the plan has not signifi-

(SIMPLE plan) is a written arrangement that

SIMPLE IRA Plan

cantly changed during the grace period.

provides you and your employees with a simpli-

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fied way to make contributions to provide retire-

The SIMPLE IRA plan would have contin-

You can use Form 5304 – SIMPLE or Form

ment income. Under a SIMPLE plan, employees

ued to qualify after the transaction if you

5305 – SIMPLE to set up a SIMPLE IRA plan.

can choose to make salary reduction contribu-

had remained a separate employer.

Each form is a model savings incentive match

tions to the plan rather than receiving these

plan for employees (SIMPLE) plan document.

amounts as part of their regular pay. In addition,

Which form you use depends on whether you

The grace period for acquisitions, dis-

you will contribute matching or nonelective con-

select a financial institution or your employees

positions, and similar transactions also

tributions.

select the institution that will receive the contri-

applies if, because of these types of

CAUTION

SIMPLE plans can only be maintained on a

butions.

transactions, you do not meet the rules ex-

calendar-year basis.

Use Form 5304 – SIMPLE if you allow each

plained under Other qualified plan or Who Can

A SIMPLE plan can be set up in either of the

plan participant to select the financial institution

Participate in a SIMPLE IRA Plan, below.

following ways.

for receiving his or her SIMPLE IRA plan contri-

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butions. Use Form 5305 – SIMPLE if you require

Other qualified plan. The SIMPLE IRA plan

Using SIMPLE IRAs (SIMPLE IRA plan).

that all contributions under the SIMPLE IRA plan

generally must be the only retirement plan to

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As part of a 401(k) plan (SIMPLE 401(k)

be deposited initially at a designated financial

which you make contributions, or to which bene-

plan).

institution.

fits accrue, for service in any year beginning with

The SIMPLE IRA plan is adopted when you

the year the SIMPLE IRA plan becomes effec-

have completed all appropriate boxes and

tive.

Many financial institutions will help you

blanks on the form and you (and the designated

TIP

set up a SIMPLE plan.

Exception. If you maintain a qualified plan

financial institution, if any) have signed it. Keep

for collective bargaining employees, you are

the original form. Do not file it with the IRS.

permitted to maintain a SIMPLE IRA plan for

other employees.

Other uses of the forms. If you set up a

SIMPLE IRA plan using Form 5304 – SIMPLE or

Who Can Participate

SIMPLE IRA Plan

Form 5305 – SIMPLE, you can use the form to

satisfy other requirements, including the follow-

in a SIMPLE IRA Plan?

ing.

A SIMPLE IRA plan is a retirement plan that

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uses SIMPLE IRAs for each eligible employee.

Meeting employer notification require-

Eligible employee. Any employee who re-

Under a SIMPLE IRA plan, a SIMPLE IRA must

ments for the SIMPLE IRA plan. Page 3 of

ceived at least $5,000 in compensation during

be set up for each eligible employee. For the

Form 5304 – SIMPLE and Page 3 of Form

any 2 years preceding the current calendar year

definition of an eligible employee, see Who Can

5305 – SIMPLE contain a Model Notifica-

and is reasonably expected to receive at least

Participate in a SIMPLE IRA Plan, later.

tion to Eligible Employees that provides

$5,000 during the current calendar year is eligi-

the necessary information to the em-

ble to participate. The term “employee” includes

Who Can Set Up

ployee.

a self-employed individual who received earned

a SIMPLE IRA Plan?

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income.

Maintaining the SIMPLE IRA plan records

You can use less restrictive eligibility require-

and proving you set up a SIMPLE IRA

You can set up a SIMPLE IRA plan if you meet

ments (but not more restrictive ones) by elimi-

plan for employees.

both the following requirements.

nating or reducing the prior year compensation

requirements, the current year compensation

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You meet the employee limit.

Deadline for setting up a SIMPLE IRA plan.

requirements, or both. For example, you can

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You can set up a SIMPLE IRA plan effective on

You do not maintain another qualified plan

allow participation for employees who received

any date between January 1 and October 1 of a

unless the other plan is for collective bar-

at least $3,000 in compensation during any pre-

year, provided you did not previously maintain a

gaining employees.

ceding calendar year. However, you cannot im-

SIMPLE IRA plan. If you previously maintained

pose any other conditions for participating in a

a SIMPLE IRA plan, you can set up a SIMPLE

SIMPLE IRA plan.

Employee limit. You can set up a SIMPLE

IRA plan effective only on January 1 of a year.

IRA plan only if you had 100 or fewer employees

Excludable employees. The following em-

This requirement does not apply if you are a new

who received $5,000 or more in compensation

ployees do not need to be covered under a

employer that comes into existence after Octo-

from you for the preceding year. Under this rule,

SIMPLE IRA plan.

ber 1 of the year the SIMPLE IRA plan is set up

you must take into account all employees em-

and you set up a SIMPLE IRA plan as soon as

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Employees who are covered by a union

ployed at any time during the calendar year

administratively feasible after you come into ex-

agreement and whose retirement benefits

regardless of whether they are eligible to partici-

istence. A SIMPLE IRA plan cannot have an

were bargained for in good faith by the

pate. Employees include self-employed individ-

effective date that is before the date you actually

employees’ union and you.

uals who received earned income and leased

adopt the plan.

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employees (defined in chapter 1).

Nonresident alien employees who have

Once you set up a SIMPLE IRA plan, you

Setting up a SIMPLE IRA. SIMPLE IRAs are

received no U.S. source wages, salaries,

must continue to meet the 100-employee limit

the individual retirement accounts or annuities

or other personal services compensation

each year you maintain the plan.

into which the contributions are deposited. A

from you.

SIMPLE IRA must be set up for each eligible

Grace period for employers who cease to

employee. Forms 5305 – S, SIMPLE Individual

meet the 100-employee limit. If you maintain

Compensation. Compensation for employ-

Retirement Trust Account, and 5305 – SA,

the SIMPLE IRA plan for at least 1 year and you

ees is the total wages required to be reported on

SIMPLE Individual Retirement Custodial Ac-

cease to meet the 100-employee limit in a later

Form W – 2. Compensation also includes the

count, are model trust and custodial account

year, you will be treated as meeting it for the 2

salary reduction contributions made under this

documents the participant and the trustee (or

calendar years immediately following the calen-

plan, compensation deferred under a section

custodian) can use for this purpose.

dar year for which you last met it.

457 plan, and the employees’ elective deferrals

A SIMPLE IRA cannot be designated as a

A different rule applies if you do not meet the

under a section 401(k) plan, a SARSEP, or a

Roth IRA. Contributions to a SIMPLE IRA will

100-employee limit because of an acquisition,

section 403(b) annuity contract. If you are

not affect the amount an individual can contrib-

disposition, or similar transaction. Under this

self-employed, compensation is your net earn-

ute to a Roth IRA.

rule, the SIMPLE IRA plan will be treated as

ings from self-employment (line 4 of Short

meeting the 100-employee limit for the year of

Schedule SE (Form 1040)) before subtracting

Deadline for setting up a SIMPLE IRA. A

the transaction and the 2 following years if both

any contributions made to the SIMPLE IRA plan

SIMPLE IRA must be set up for an employee

the following conditions are satisfied.

for yourself.

before the first date by which a contribution is

Page 10

Chapter 3 SIMPLE Plans

Publication 560 - Retirement Plans For Small Business - 2001 Page 10

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