SIMPLE IRA Plan Notices Are Due Soon
If your financial organization offers SIMPLE IRAs, you’re probably aware that the related plan notice deadlines are fast approaching. Financial organizations that hold SIMPLE IRA assets must provide a summary description to the employers that are sponsoring a SIMPLE IRA plan no later than October 31. This deadline allows the employers to, in turn, provide the summary description to their employees by November 1—before the beginning of the employees’ 60-day election period (November 2 through December 31).
As with most other employee benefit plans, eligible employees of a SIMPLE IRA plan must receive appropriate benefit and notification information from the plan administrator (generally, the employer) before the start of any new plan year. Both the employer sponsoring the SIMPLE IRA plan and the financial organization holding the SIMPLE IRA assets must meet certain notification requirements. Because employers may look to your organization to find out when SIMPLE IRA notices are due and what must be included in them, your organization should review the notice requirements.
Summary Description
The SIMPLE IRA plan summary description should be an easy-to-understand, written description of the employer’s SIMPLE IRA plan for the upcoming year. It must disclose
the name and address of the employer and financial organization,
the plan’s eligibility requirements,
plan benefits,
the time and method for making employee elections, and
the procedures and effects of withdrawals.
As part of the requirement to disclose plan benefits (third bullet), the employer must indicate its employer contribution method for the upcoming year: a dollar-for-dollar matching contribution up to three percent of compensation; a reduced matching contribution, but not lower than one percent (in any two years out of a five-year period); a two percent nonelective contribution. By clearly disclosing the employer contribution for each year in the summary description, this requirement is satisfied.
According to IRS Notice 98-4, if using the IRS model Form 5305-SIMPLE or Form 5304-SIMPLE, the financial organization may satisfy its portion of the summary description requirement by providing the employer with a current copy of the model form with instructions, distribution procedures (as required by Section VI of the model forms), and the financial organization’s name and address.
As previously noted, the employer must provide the summary description to employees before their 60-day election period. One exception to this deadline is when an employer first establishes a SIMPLE IRA plan mid-year. In that situation, the 60-day election period may begin as early as 60 days before the date on which the employees become eligible, but no later than the date on which the employees become eligible. Once employees become eligible, they must be allowed to begin deferrals, regardless of whether the 60-day period has expired.
EXAMPLE: An employer establishes a new SIMPLE IRA plan effective July 1, 2020. The 60-day election period for all eligible employees can begin no earlier than May 2, 2020 (60 days before the date the employees become eligible), and must begin no later than July 1, 2020 (the date the employees become eligible). Because the plan is effective July 1, 2020, each eligible employee can contribute into the plan as of that date, even if the 60-day election period has not ended by July 1.
Because SIMPLE IRA plans must operate on a calendar year basis, the employer must again provide a summary description with the employee notification before November 2, 2020, for the 2021 plan year.
Many financial organizations have found that gathering the required information to satisfy the summary description requirements can be difficult. Some of the summary description elements are specific to the employer’s plan (e.g., eligibility requirements and plan benefits), and often financial organizations don’t have access to the employer-specific information that’s needed.
Regardless, the IRS can assess financial organizations a fine of $50 per day for failing to provide a summary description to the employer, unless the financial organization can demonstrate reasonable cause for the failure. IRS Notice 98-4 indicates that reasonable cause may be shown if the SIMPLE IRA owner receives a summary description from the employer or from another financial organization. Reasonable cause may also be shown if an employer working with a designated financial institution provides all eligible employees with the summary description information (excluding the withdrawal procedures), while the financial organization holding the employees’ SIMPLE IRAs provides its name, address, and withdrawal procedures.
It may be beneficial for financial organizations to create a written agreement with employers describing how the summary description will be distributed. For example, a financial organization may provide its name, address, and withdrawal procedures, and ask the employer to sign an agreement stating that the employer will provide the complete summary description to its eligible employees each year. Or a financial organization may ask the employer to sign an agreement indicating that the financial organization will provide its name, address, and withdrawal procedures to its SIMPLE IRA owners, and the employer will provide the remaining summary description information to its employees each year.
Employee Notification
Along with the summary description, an employer must notify all eligible employees of their opportunity to enter into a salary reduction agreement or to modify a prior salary reduction election. The employer must also disclose that, if the employer is not using a designated financial institution, each employee has the option to select a different financial organization to serve as trustee or custodian of her SIMPLE IRA. An employer must give this employee notification immediately before the employees’ 60-day election period. An employer that does not provide these disclosures may be penalized $50 per day until they are provided.
If not mentioned in the summary description, the employer can also use the employee notification to disclose the contribution method for the year (three percent match, one to three percent match, or two percent nonelective contribution). For plans that are established with IRS model Form 5305-SIMPLE or Form 5304-SIMPLE, the notification requirements may be satisfied by providing a completed copy of the appropriate model form, documenting the terms of the employer’s plan (including the information on distribution procedures, which the financial organization includes on the model form).
Meeting the requirements and deadlines for providing SIMPLE IRA plan notices is the responsibility of both the financial organization and the employer. Be sure that your organization understands the rules and has a streamlined process in place to fulfill its obligation.
