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LaVon M. Martin, CPA
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Questions on SIMPLE Retirement Plans

Below is a question posted on the usenet newsgroup misc.taxes.moderated dealing with SIMPLE plans and responses to the questions asked. Ed Zollars, CPA wrote the answers to this general set of questions on what a SIMPLE plan provides. The portions in italics are the questions asked by the person asking the questions.

Developments are occurring rapidly in this area, since the plans are so new. If you believe you might interested in starting up a SIMPLE and wish to engage us to consult with you on the feasibility and structure of such a plan please call us at (602) 955-8530 or email us at htmzcpas@getnet.com.

I'm looking for some info on SIMPLE plans. Here are my specific questions:

1. Is $6000 the limit *I* can contribute to a SIMPLE plan for a given tax year, or does that $6000 include matching contributions?

That is the maximum you can defer, and does not include the "employer" matching contribution (I put employer in quotation marks, since if you are self-employed, you end up filling both roles).

2. I know contributions must be matched by my employer in one of two ways, either x% for the employees who participate, or y% for all employees regardless of direct participation. What are these two percentages, and are they percentages of gross income, or of the employee contributions?

The employer generally must match up to 3% of the employee's compensation--so if the employee defers 3%, then the employer puts in 3%. If the employee defers 4%, the employer still puts in 3%. If you are using the SIMPLE-IRA mechanism (rather than SIMPLE 401(k)), you can optionally reduce the match to 1% in 2 out of every 5 years.

Another option under either system is to do an across the board employer contribution of 2% of compensation, noting that the 401(a)(17) limitations will apply in this case to limit the maximum considered compensation to $160,000.

3. Must the employer make matching contributions every month or pay period during the year, or can s/he hold the accumulated matching funds until the end of the year and deposit them to my account in a lump sum?

IRS Notice 97-6 provides:

-- begin quoted text

A. G-6: Matching and nonelective employer contributions must be made to the financial institution maintaining the SIMPLE IRA no later than the due date for filing the employer's income tax return, including extensions, for the taxable year that includes the last day of the calendar year for which the contributions are made.

-- end quoted text

4. If the employer *is* allowed to make a yearly lump sum matching contribution, is any interest or gain on the matching portion that has accrued during the year also credited to the employee's account at that time, or does it belong to the employer?

The employer not only isn't required to make a contribution of interest or gain, the employer would be prohibited from making such a contribution, since that would be in excess of the amounts allowed. An employer that is concerned about such issues should deposit the matching contribution earlier in the year.

5. On termination of employment, can a SIMPLE be rolled over to an IRA like a 401(k) or 403(b)? If so, does the 60 day period apply?

Are we talking the 401(k) or IRA variety? Actually, except for the special period of the first two years, a SIMPLE-IRA is treated just like a regular IRA. Similarly, a 401(k) plan with SIMPLE provisions would work like a regular qualified plan.

6. If it can be rolled over, can it be rolled back to another SIMPLE in the future, and does the common advice against mixing it with contributory IRA funds still hold true for that reason?

If it's a SIMPLE-IRA, then it can only be rolled to other IRA's--you can't put it into a future qualified plan.

If it's a SIMPLE 401(k), then it work like other qualified plans and you could still use a conduit IRA to hold funds rolled from the plan that you expected to roll into another qualified plan in the future.

7. Can one take a loan against a SIMPLE, as one can do with a 401(k)? (My guess is no).

No for the SIMPLE IRA, since you can't borrow against an IRA account.

8. Is the SIMPLE a qualified plan, affecting the "deductibility" of my other IRA contributions much the same as a 401(k) or 403(b)? In other words, if I participate in a SIMPLE I can still contribute the lesser of $2000 or my earned income to another IRA, correct? (I make too much to "deduct" it, my wife's in a 401(k) anyway, and yes, I'll do an 8606!)

Yes to both questions. You will be a participant and you can still make an IRA contribution (even though it may not be deductible).

9. I'll assume any premature distribution is subject to income tax and the 10% penalty.

During the first two years of participation in the SIMPLE, the penalty is *25%*--be careful of that one.

In the event of a premature distribution where the funds are made available to the employee (not a direct or custodial rollover, and not an "FBO" check) is the employer required to withhold 10%, as with an IRA, or 20%, as with a 401(k)?

Depends again if the IRA or 401(k) vehicle is used. In the IRA the answer is no, but for the qualified plan the answer is yes.

If you want to see even more gory details, I've got IRS Notice 97-6 posted at our site. That notice describes the IRA variety of SIMPLE plans and answers a bunch of questions. You can find it at:


The notice also doubles as a great insomnia cure.

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