Tag Archive for: SIMPLE IRA

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SIMPLE IRA Plan Termination and Two-Year Rollover Rule

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“One of my clients terminated his SIMPLE IRA plan at the end of 2023 and established a 401(k) plan beginning 2024. He’s worried about the two-year waiting period for distributing assets held in the now terminated SIMPLE IRA plan. Is there any leeway with the waiting period for a terminated SIMPLE IRA plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor in Ohio is representative of a common inquiry involving a savings incentive match plan for employees SIMPLE IRA plan.

Highlights of Discussion
Yes, there is, and we just received more clarification on this issue in IRS Notice 2024-02. You are aware that a distribution from a SIMPLE IRA within the first two years of an individual’s participation in the SIMPLE IRA plan, potentially, is subject to a 25 percent early distribution penalty tax unless the amount is being moved to another SIMPLE IRA plan or a penalty exception applies.

Section 332(b) of the SECURE Act 2.0 adds Internal Revenue Code (IRC) Sec. 72(t)(6)(B) to the IRC and amends IRC Sec. 408(d)(3)(G). Under the addition and amendment, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions (as described next), then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions (Q&A G4 of Notice 2024-02).

In the case of a 401(k) plan, distributions must be limited to those triggers listed in IRC Sec. 401(k)(2)(B):
• Severance from employment,
• Death,
• Disability,
• Plan termination,
• Attainment of age 59½,
• Hardship,
• As a qualified reservist distribution,
• For certain lifetime income investments and
• As qualified long-term care distributions.

Further, amounts may not be distributable by reason of the completion of a stated period of participation or the lapse of a fixed number of years (e.g., no in-service distributions prior to age 59 ½). Be sure to check the 401(k) plan document for its treatment of rollover contributions. Some plans allow distributions of rollover amounts at any time.

For 403(b) plans, rollover contributions from the terminated SIMPLE IRA plan must be limited to those triggers listed in IRC Sec. 403(b)(11), which are similar to those listed above.

Conclusion
Under SECURE Act 2.0, with clarification by Notice 2024-02, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions as prescribed, then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions. An in-service distribution provision before age 59 ½ would not align with the necessary distribution restrictions for the waiver.

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Deadline for Setting Up a SIMPLE IRA Plan

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Did SECURE Acts 1.0 and/or 2.0 Change the Deadline for Setting Up a SIMPLE IRA Plan?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in New Mexico is representative of an inquiry involving a savings incentive match plan for employees (SIMPLE) IRA plan.

Highlights of the Discussion

The short answer is no. While SECURE Acts 1.0 and/or 2.0 have given us a multitude of retirement plan changes, they did not affect the deadline for setting up a SIMPLE IRA plan. The general deadline for establishing a SIMPLE IRA plan for a given year is still October 1 of the year.  For example, the deadline for an eligible business owner to set up a SIMPLE IRA plan for 2023 is October 1, 2023.

There are two exceptions to the general rule as follow (See IRS Notice 98-4, Q&A K-1).

  1. If the business comes into existence after October 1 of the year the SIMPLE IRA plan is desired, then the new business owner may still set up a SIMPLE IRA plan for the year, provided he or she does so as soon as administratively feasible after the start of the new business.
  2. If a business has previously maintained a SIMPLE IRA plan, then it may only set up a new SIMPLE IRA plan effective on January 1 of the following year (e.g., set up the plan in 2023 with an effective date of January 1, 2024).

Businesses that are eligible to establish SIMPLE IRA plans are those that

  1. Do not maintain any other qualified retirement plans; and
  2. Have 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding year [IRC §408(p)(2)(c)(i) and IRS Notice 98-4, Q&A B4 ].

However, an employer can use less restrictive participation requirements if it so desires.

(Note that SECURE Act 2.0, beginning in 2024, will allow employers to replace their SIMPLE IRA plans mid-year with an “eligible 401(k) replacement plan.” See a prior Case of the Week  “A SIMPLE Switch” for more information.)

The basic steps for establishing a SIMPLE IRA plan are

  1. Execute a written plan document (either a government Form 5304-SIMPLE or Form 5305-SIMPLE, or a prototype plan document from a mutual fund company, insurance company, bank or other qualified institution);
  2. Provide notice to employees; and
  3. Ensure each participant sets up a SIMPLE IRA to receive contributions.

Employees who are eligible to participate in a SIMPLE IRA plan are those who received at least $5,000 in compensation from the employer during any two preceding years and are reasonably expected to receive at least $5,000 in compensation during the current year.

Conclusion

Business owners who are interested in establishing SIMPLE IRA plans must be aware of the deadline to do so, and the additional steps involved to ensure a successful set up.

 

 

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A SIMPLE Switch

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“Can I terminate my SIMPLE IRA plan and start a 401(k) plan mid-year?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to SECURE Act 2.0 of 2022 (SECURE 2.0).

Highlights of the Discussion

That’s a straightforward question that, currently, has a problematic answer due to the “exclusive plan rule,” which says the SIMPLE must be the only plan the business maintains for the year. Problem solved—thanks to SECURE 2.0 for plan years beginning after December 31, 2023.

For the 2024 plan year and later plan years, employers may replace their SIMPLE IRA plans mid-year with what we will call an “eligible 401(k) replacement plan.” The annual deferral limits are different for the two plan types. Therefore, under the new rules, the participant’s annual deferral limit will be prorated (by day) between the SIMPLE IRA plan and the eligible 401(k) replacement plan for the year.

An eligible 401(k) replacement plan, for this purpose, is a

  • SIMPLE 401(k),
  • Safe Harbor 401(k),
  • 401(k) with a qualified automatic contribution arrangement (QACA), or
  • Starter 401(k) (new under SECURE 2.0).

 

Eligible 401(k) Replacement Plan Key Characteristics
A SIMPLE 401(k)
  • Employer has 100 or fewer employees
  • Must be the only plan maintained by the employer
  • Must file a Form 5500 annually
  • Voluntary employee deferrals
  • Mandatory employer contributions (generally, 3% match or 2% nonelective)
  • Immediate vesting for contribution types
  • Additional information at IRS SIMPLE 401k facts
Safe Harbor 401(k)
  • No limit on number of employees
  • Voluntary employee deferrals
  • Mandatory employer contributions—3 options
  1. Basic match: 100% percent match on deferrals up to 3% of compensation and a 50% match on deferrals between 3% and 5%
  2. Enhanced match:  At least equal to the aggregate match under the basic match formula (e.g., 100% match on deferrals of 4% compensation) or
  3. A 3% nonelective contribution
QACA 401(k)
  • No limit on number of employees
  • Automatic enrollment of at least 3% with automatic escalation of at least 1% annually after the initial period, to at least 6% up to a maximum of 15%
  • Mandatory employer contributions—2 options
  1. Matching contribution: 100% match on deferrals up to 1% of compensation and a 50% match on deferrals between 1% to 6% of compensation; or
  2. A 3% nonelective contribution
  • Two-year vesting schedule could apply to employer contributions
  • Standard Form 5500 filing rules apply
  • Additional information IRS QACA facts
Starter 401(k)

Available for plan years after December 31, 2023
  • For employers without a qualified plan
  • Must be the only plan maintained by the employer
  • No limit on the number of employees
  • Automatic enrollment at 3% up to 15% of compensation
  • Deferrals limited to the annual IRA contribution limit (i.e., $6,000 indexed, plus $1,000 in catch-up indexed)
  • No employer contributions
  • Standard Form 5500 filing rules apply

What’s more, SECURE 2.0 will help SIMPLE IRA plan participants who are experiencing a mid-year plan switch, overcome another, potentially expensive, hurdle. Currently, SIMPLE IRA participants cannot roll over the assets from their SIMPLE IRAs to another plan within the first two years of participation without incurring a 25 percent penalty, unless they have a penalty exception (e.g., age 59 ½). During the initial two-year participation period participants can only transfer money to another SIMPLE IRA. SECURE 2.0 will waive that penalty starting with the 2024 plan year in certain circumstances. If an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan (or, for rollover purposes, a 403(b) plan), rollovers between the SIMPLE IRAs to the new 401(k) plan are allowed if the rolled amount is subject to 401(k) distribution restrictions (e.g., age 59 ½, death, severance of employment, hardship, etc.).

Through the 2023 plan year, however, the current SIMPLE IRA rules are in place. Consequently, if an employer maintains another plan during the same year it has a SIMPLE IRA plan, the employer violates the exclusive plan rule and invalidates the SIMPLE IRA plan, technically, making all contributions to the SIMPLE IRA excess contributions. According to the IRS’s, SIMPLE IRA Plan Fix-It Guide, which is based on its Employee Plans Compliance Resolution System (EPCRS), the business owner may be able to file a Voluntary Correction Program (VCP) submission requesting that contributions made for previous years in which more than one plan was maintained remain in the employees’ SIMPLE IRAs. User fees for VCP submissions are generally based upon the current value of all SIMPLE IRAs that are associated with the SIMPLE plan. Self-correction is not available for this type of error. Further correction information is available here.

Options for 2023 when considering a mid-year plan switch from a SIMPLE IRA plan

  • Wait to start a new 401(k) plan until January 1, 2024, providing required notices prior.
  • If a switch to a 401(k) plan is made mid-year 2023, contemplate a VCP filing.

Options for 2024 when considering a mid-year plan switch from a SIMPLE IRA plan

  • Wait to start a new 401(k) plan until January 1, 2025, providing required notices prior.
  • Take advantage of the SECURE 2.0 change and adopt one of the eligible 401(k) replacement plans.

Conclusion

For 2023, switching from a SIMPLE IRA plan to another plan type mid-year is problematic, and may involve an IRS VCP filing (with fees). SECURE 2.0 provides relief for 2024 and later years for this scenario when adopting an eligible 401(k) replacement plan.

 

 

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The Dos and Don’ts of Aggregating Required Minimum Distributions

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“I have a 72-year-old client who is retired.  He has numerous retirement savings arrangements, including a Roth IRA, multiple traditional IRAs, a SEP IRA and a 401(k) plan. Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common question involving required minimum distributions (RMDs) from retirement plans.

Highlights of Discussion

No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another. Participants in retirement plans, such as 401(k), 457, defined contribution and defined benefit plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one retirement plan, he or she must satisfy the RMD from each plan separately.

With respect to your client’s IRAs, however, there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.

Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs. RMDs from inherited Roth IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, considering only those inherited Roth IRAs owned as a beneficiary of the same decedent.

403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts. However, only amounts in 403(b) contracts that an individual holds as an employee (and not a beneficiary) may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

In most cases, individuals who are over age 72 are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to aggregate RMDs for IRAs and 403(b)s, but one must be careful to apply the rules for RMD aggregation correctly. Failure to take an RMD when required could subject the recipient to a sizeable penalty (i.e., 50 percent of the amount not taken).

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Don’t Forget About the Benefits of a Qualified Charitable Distribution for 2022

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“I have an 84-year-old client with a multi-million dollar IRA.  As you can well image, his required minimum distribution (RMD) for the year is quite large. Do you have any suggestions on how he might reduce the tax impact of such a large RMD?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Illinois is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, the first idea that comes to mind is making a qualified charitable distribution (QCD) by December 31, 2022. A QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.”(The IRA owner cannot have received the amount.) QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • What are the benefits of making a QCD? Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD
    • Is excludable from taxable income (up to $100,000),
    • May count towards the individual’s RMD for the year,
    • May lower taxable income enough for the person to avoid paying additional Medicare premiums and
    • Is a philanthropic way to support a favored charity.
  • Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.*
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactive” SEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • Generally, qualifying charitable organizations include those described in 170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).

Conclusion

Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.

* Apart from a QCD, IRA owners who take taxable IRA distributions and donate them to charitable organizations may be eligible to deduct such amounts on their tax returns for the year if they itemize deductions (Schedule A of Form 1040).  See IRS Tax Topic 506 and IRS Publication 526, Charitable Contributions for more information

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2021 Qualified Charitable Distributions from IRAs

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“The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the age for taking requirement minimum distributions (RMDs) to age 72.  Did it also change the age for making Qualified Charitable Distributions (QCDs)?”

 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Alabama is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • No, the SECURE Act did not change the eligibility age for making a QCD; it remains at 70½. So, any “eligible IRA owner or beneficiary” (defined below) can make a QCD up to $100,000 for 2021 by December 31, 2021.  The contributor must keep records to prove the amount of the QCD  (see Substantiation Requirements in IRS Publication 526, Charitable Contributions).
  • Those who make QCDs before reaching age 72 will not have the added benefit of counting them towards their RMDs, but the QCDs still will be excludable from taxable income and go towards supporting good causes. Because a QCD reduces taxable income, other potential benefits may result, for example, a person may be able to avoid paying higher Medicare premiums. Note that for those who make both QCDs and deductible IRA contributions[1] in the same year may need to limit the portion of a QCD that is excluded from income.
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has attained age 70½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactive” SEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • A QCD is any otherwise taxable distribution (up to $100,000 per year) that an eligible person directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Tax Exempt Organization Search, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions. Note that a QCD contributor would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7 , Q&A 40).
  • There are other charitable giving options aside from QCDs. For example, the Consolidated Appropriations Act extended two temporary tax changes through the end of 2021 to encourage charitable giving by individuals (see Covid Tax Tip 2021-143). They include 1) a limited deduction (up to $600 for married couples) for charitable cash contributions for individuals who do not itemize deductions; and 2) a deduction of up to 100 percent of the taxpayer’s adjusted gross income for certain charitable cash contributions (if properly elected on their 2021 Form 1040 or Form 1040-SR) by those who itemize their deductions.
  • As one can see, the options for charitable giving are many and can be confusing, making consultation with a tax professional a recommended course of action.

Conclusion

Eligible traditional and Roth IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.  Law changes and extensions have enhanced other giving options, making professional tax advice essential when making a gifting decision.

 

[1] The SECURE Act also eliminated the maximum age limit for making traditional IRA contributions.

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Deadlines to deposit elective deferrals

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“I get confused by the various deposit deadlines for employee salary deferrals. Can you summarize them for me, please?” 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from North Carolina is representative of a common inquiry related to depositing employee salary deferrals.  

Highlights of the Discussion

The following table summarizes the Department of Labor’s (DOL’s) deferral deposit deadlines for various plan types.

Plan Type Deadline Citation
Small 401(k) Plan

A plan with fewer than 100 participants

 

 Safe Harbor Rule: The plan sponsor has seven business days following the day on which such amounts were withheld to deposit them to the plan. DOL Reg. 2510-3-102(a)(2)

 
Large 401(k) Plan

A plan with 100 or more participants

 The plan sponsor must deposit deferrals as soon as they can be reasonably segregated from the employer’s assets, but not later than 15 business days following the month the deferrals are withheld from the participants’ pay. DOL Reg. 2510-3-102(a)(1) and (b)(1)

 
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Deferrals must be deposited within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee. DOL Reg. 2510.3-102(b)(2)

 
Salary Reduction Simplified Employee Pension (SAR-SEP)

An IRA-based plan with 25 or fewer employees.

 Safe Harbor Rule: The plan sponsor has seven business days following the day on which such amounts were withheld to deposit them to the plan. DOL Reg. 2510-3-102(a)(2)

 

Conclusion

The DOL’s top compliance concern is the timely deposit of employee salary deferrals to their respective plans. Plan sponsors and service providers must ensure policies and procedures are in place to ensure deferral deposit deadlines are met.

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When SIMPLE IRA plans are not so simple Part II the 100-employee limit

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“My client maintains a SIMPLE IRA plan for his small business. He is planning to expand and hire more employees. What happens to the SIMPLE IRA plan if his payroll grows to more than 100 workers?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA plans.

Highlights of the Discussion

Among the employer eligibility rules for maintaining a SIMPLE IRA plan is the “100 employee limit.” In general, an employer may maintain a SIMPLE IRA plan if the business has 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding year [IRC §408(p)(2)(c)(i) IRC §408(p)(2)(c)(i) and IRS Notice 98-4, Q&As B1 and B2].

The IRS provides for a two-year grace period for employers who had 100 or fewer employees, but then grew to exceed the 100-employee limit. An employer that maintains a SIMPLE IRA plan is treated as satisfying the 100-employee limitation for the two calendar years immediately following the calendar year for which it last satisfied the 100-employee limitation, except in the case of a merger or acquisition. If the failure to satisfy the 100-employee limitation is due to an acquisition, disposition or similar transaction involving the employer, then the grace period runs through the end of the year following the year of acquisition or similar transaction. (See When SIMPLE IRA plans aren’t so simple Part 1 for additional guidance on acquisitions involving SIMPLE IRA plans.)

EXAMPLE 1

At the beginning of 2019, Company A employs 75 workers for which it maintains a SIMPLE IRA plan. In response to an expanding client base and increasing demand for products, Company A hires 27 new, full-time workers in July of 2019. Assuming a constant work force and constant salaries, Company A may maintain its SIMPLE IRA plan through 2021. (2019 is considered an eligible year, because eligibility is based on the preceding year. Therefore, the two years immediately following the last eligible year are 2020 and 2021.)

EXAMPLE 2

Assume the same facts as in Example 1, except in 2019 Company A acquires Company B and its 27 full-time workers. Assuming a constant work force and constant salaries, Company A may maintain its SIMPLE IRA plan through 2020. [The grace period runs from 2019 (the year of acquisition) through the end of the year following the year of acquisition.]

Conclusion

Sponsors of SIMPLE IRA plans must understand the ins and outs of the 100-employee limit for eligibility in order to avoid creating excess contributions. The 100-employee limit comes with a grace period that can be tricky to apply.

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When SIMPLE IRA plans aren’t so simple Part 1 Mergers and Acquisitions

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Following an acquisition, can a business owner continue to offer both a SIMPLE IRA and a 401(k) plan at the same time?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA plans. The advisor explained: “A CPA that I network with had a small business client that maintained a SIMPLE IRA plan. The CPA’s client purchased another business in 2018 via a stock acquisition. The acquired business brought with it a 401(k) plan.”

Highlights of the Discussion

Because of the circumstance (i.e., an acquisition) an exception to the “exclusive plan rule” for SIMPLE IRA plans applies.  Among the employer eligibility rules for maintaining a SIMPLE IRA plan is the exclusive plan rule. In general, a single employer may not maintain a SIMPLE IRA plan in the same calendar year it maintains any other type of qualified retirement plan.[1]

In the situation noted above, the merger of the two businesses results in one employer with two plans (a 401(k) and SIMPLE IRA plan) during the same calendar year. Fortunately, a temporary exception to the exclusive plan rule is available. The temporary exception allows the merged businesses to maintain another plan in addition to the SIMPLE IRA plan during the year of merger or acquisition, and the following year as long as, only the original participants continue in the SIMPLE IRA plan (See Q&A B-3(2) of IRS Notice 98-4).

Let’s use this situation as an example. The ownership change occurred in 2018. The SIMPLE IRA plan can be maintained in 2018 and through 2019, along with the 401(k) plan, without running afoul of the exclusive plan rule. Before 2020, however, either the SIMPLE IRA plan or the 401(k) must be terminated.

Conclusion

Acquisitions and mergers involving multiple retirement plans can complicate SIMPLE IRA plan operations due to the exclusive plan rule. It is important to be aware of the transition rule in these scenarios.

[1] Another plan would include a defined benefit, defined contribution, 401(k), 403(a) annuity, 403(b),  a governmental plan other than a 457(b) plan, or a SEP plan.

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Retirement Savings Tax Credit

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“What contributions are eligible for the retirement savings tax credit?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Oklahoma is representative of a common inquiry regarding available tax credits for retirement contributions.

Highlights of Discussion

IRA owners and retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of the taxpayer’s retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040A or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan; and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP) IRA,
  • 403(b) or
  • Governmental 457(b) plan.

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level.

2018 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $38,000 AGI not more than $28,500 AGI not more than $19,000
20% of your contribution $38,001 – $41,000 $28,501 – $30,750 $19,001 – $20,500
10% of your contribution $41,001 – $63,000 $30,751 – $47,250 $20,501 – $31,500

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan related tax credits for which they may qualify.

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