IRS Issues Guidance on SIMPLE IRAsWashington, DC, December 26, 1996 - The Internal Revenue Service has released Notice 97-6, providing comprehensive guidance on SIMPLE IRAs. Key items are summarized below. Employer Eligibility To Establish SIMPLE Plan
100 Employee Limitation
Only employers with no more than 100 employees earning more than $5,000 in compensation in the preceding year may establish a SIMPLE Plan. The Notice clarifies that all employees employed at any time during the preceding calendar year (subject to the $5,000 compensation requirement) must be counted toward this limit, including those employees excludable under Code section 410(b)(3) and those who have not met the plan's minimum eligibility requirements. Also, employee aggregation and leased employee rules will apply when applying the 100-employee limitation. Q&A B-1, B-5. Tax-Exempt and Governmental Entities
Tax-exempt employers and governmental entities are permitted to establish SIMPLE plans. Q&A B-4. Employee Eligibility To Participate In SIMPLE Plan
Section 410(b)(3) Excludability
Although such employees must be counted in applying the 100-employee limitation, the employer may exclude from plan eligibility employees described in Code section 410(b)(3). Q&A C-1. Employer Flexibility
Employers may impose less restrictive eligibility requirements by eliminating or reducing the $5,000 compensation requirements. Q&A C-2. Application of Code Section 401(a)(17) Compensation Limit
The $160,000 compensation limit applies to the compensation taken into account for purposes of calculating the employer's two-percent nonelective contribution to a SIMPLE. This limit, however, does not apply to the alternative 3% matching formula. Q&A D-6, I-6. Employee's Sixty-Day Election Period
Employees must be provided an annual sixty-day election period during which they may decide whether to participate in the SIMPLE plan or alter a prior salary reduction agreement. The Notice states that during this sixty-day period employees have the right to modify their elections "without restriction." Additionally, where an election is made during the calendar year in which an employee is eligible to participate in the SIMPLE plan, the employee must be able to commence contributions as soon as eligible, regardless of whether the sixty-day period has ended. Q&A E-1, E-2. Administrative and Reporting Requirements For SIMPLE Trustees
Information to Employers
A SIMPLE IRA trustee must provide a summary description, as described in Notice 97-6, to an employer sponsor "early enough to allow the employer to meet its notification requirements" (i.e., the employer must be able to provide notice to employees immediately before the employees' sixty-day election period begins). The Notice also provides that, in lieu of providing summary description information to the employer, it may be provided directly to all eligible employees in the employer's SIMPLE plan. Finally, as stated previously in Form 5305-SIMPLE instructions, this requirement may be satisfied by providing the employer with a current copy of Form 5305-SIMPLE, its instructions, information necessary to complete the Form, and guidance concerning the need for the employer to complete the Form and distribute it to all eligible employees. Q&A H-1. Trustees of a "transfer SIMPLE IRA" need not provide the summary plan description to the employer. A "transfer SIMPLE IRA" is one to which the employer has not made contributions under the SIMPLE plan. Q&A H-1. Information to Participants
Within thirty days after the close of each calendar year, the SIMPLE IRA trustee must provide the participant a statement including the account balance and account activity during the year. The trustee must also furnish such other information as is required to be provided to other IRA accountholders. Q&A H-2. Tax Information Reporting
The IRS will modify Form 5498 to require reporting of SIMPLE IRA contributions, rollover contributions and fair market value. Distributions from a SIMPLE IRA must be reported on Form 1099-R, which will also be revised. Q&A H-3, H-4. SIMPLE IRA trustees are also required to report whether a distribution occurred during the two-year period established for SIMPLE IRAs. The trustee, however, may prepare this report "on the basis of its own records" and "is not required [ ] to take into account other adequately substantiated information regarding the date on which an individual first participated. . . ." Q&A H-5. The Notice clarifies that the two-year period begins "on the first day on which contributions made by the individual's employer are deposited in the individual's SIMPLE IRA." Q&A I-5. The Notice further explains that the 25% tax for distributions made within the two-year period is applied as the current 10% tax is. Specifically, the exceptions to the application of the tax under Code section 72(t) apply within the two-year period. For example, the 25% tax is not applied to any distribution paid after age 59 1/2, after death, or in a series of substantially equal payments made within the two-year period. Q&A I-2. Designated Financial Institutions (DFIs)
Employer Not Required To Select A DFI
Notice 97-6 clarifies that an employer establishing a SIMPLE plan need not designate a particular institution to which all contributions under the SIMPLE plan will be made. In such instances, however, the employer must make contributions to the financial institution selected by each employee. Q&A E-4, J-1. New Form 5305-SIMPLE For Non-DFI Plans To Be Issued
The IRS intends to issue a model form that may be used by employers establishing SIMPLE plans that do not use a DFI. Until the form is issued, the previously issued Form 5305-SIMPLE, which is designed for plans with a DFI, may be modified for this purpose. Necessary modifications are described in detail at Q&A K-3 of the Notice. DFIs Are Created Only By Agreement Between Employer and Financial Institution
A financial institution may not, by default, become a DFI. The Notice explains that an employer may make all SIMPLE contributions to a single, designated financial institution, pursuant to Code section 408(p)(7), only if (1) the financial institution agrees to serve as DFI and agrees to transfer, upon participant request, the participant's balance to another SIMPLE IRA at a financial institution selected by the participant, and (2) each participant is provided with written notice of the transfer procedures. Examples illustrating these principles are provided at Q&A J-1. Example 2 indicates that absent explicit agreement with the employer, a financial institution will not by default become a DFI, if after a presentation of its investment options to employees, each establishes his or her SIMPLE IRA with that institution. Also, if an employer establishes SIMPLE IRA accounts at a financial institution for employees who had opportunity to establish their own elsewhere and failed to do so, that will not result in DFI status. Q&A J-1, Example 3; see also Q&A G-4. Frequency of Account Transfer Election and of Account Transfers
The Notice distinguishes between the opportunity that must be provided to participants to elect to transfer assets from the DFI elsewhere and the transfer activity itself. Participants need be given "only a reasonable period of time each year" in which to elect to transfer account balances without cost or penalty. Providing an annual election opportunity each calendar year during the sixty-day period relating to salary deferral elections is sufficient to meet this "reasonable period" standard. Q&A J-2. Such elections may apply only prospectively to contributions in forthcoming calendar years, i.e., to only "new" monies not yet received by the plan. A charge for transfer of previously contributed assets may be imposed for such previously accumulated account balances. See Q&A J-2, Example 2. The Notice, however, distinguishes this annual opportunity to elect to transfer prospective contributions from the transfer activity itself. Once a participant elects to transfer prospective SIMPLE contributions from a DFI to another financial institution, the SIMPLE IRA balance must be transferred on a "reasonably frequent basis." Monthly transfers are deemed to satisfy this standard. Q&A J-3. Furthermore, the transfer must be a trustee-to-trustee transfer directly to a SIMPLE IRA (or to a traditional IRA, where the two-year period has been satisfied). Q&A J-4. The Meaning of the "Without Cost or Penalty" Clause
Code section 408(p)(7) requires transfers from DFIs to be made "without cost or penalty." A transfer is deemed to satisfy this requirement "if no liquidation, transaction, redemption or termination fee, or any commission, load (whether front-end or back-end) or surrender charge" is imposed with respect to the balance transferred. The Notice, however, permits a SIMPLE plan to offer investment options to which such charges apply where there is one specified investment option available that satisfies this "cost or penalty" prohibition. Furthermore, plans may automatically deposit assets designated for transfer in that one specified option. Q&A J-4. The Notice clarifies that DFIs may assess a "reasonable annual administrative fee" with respect to SIMPLE IRA accounts, including those from which balances are transferred to another institution pursuant to participant election. This fee will not violate the "cost or penalty" prohibition. Q&A J-4, Example 2. DFIs may also charge an employer an amount that takes into account the DFI's transfer responsibilities "provided that the charge is not passed through to the participants who request the transfer." Q&A J-5.
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