IRS nixes mid-year terminations of SIMPLE IRAs
Many small employers have what is known as a SIMPLE IRA (SIMPLE stands for Savings Incentive Match Plan for Employees). SIMPLE IRAs are designed to be cost-effective savings plans for small employers to offer their employees. Unfortunately, the economic downturn has many small businesses questioning if they can terminate their SIMPLE IRAs or stop, in mid-year, non-elective contributions they had previously promised to employees. The IRS recently said that the answer to both questions is no.
Contributions
Under a SIMPLE IRA plan, employers may make either a three-percent matching contribution or a two-percent non-elective contribution. Employees are fully vested in all amounts in their IRAs. An employer with a SIMPLE IRA generally cannot sponsor any other retirement plan. The employer may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan.
Employers may reduce the amount of the matching contribution to no lower than one-percent and for no more than two calendar years in the five-year period ending with the calendar year the reduction is effective. Employers must notify employees of the reduced contribution.
Termination
A SIMPLE IRA plan cannot be terminated in mid-year, the IRS explained. A SIMPLE IRA can only be terminated prospectively, beginning no earlier than the next calendar year. Contributions must continue until then, the IRS advised.
Additionally, employees must be notified within a reasonable time before their 60-day election period that the SIMPLE IRA plan will be discontinued. Employers do not need to notify the IRS of their decision to terminate a SIMPLE IRA.
If you offer a SIMPLE IRA to your employees, please contact our office if you have any questions about your responsibilities.
(IRS Employee Plans News, Summer 2009)
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