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

“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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