SEP IRA

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Public Health 257b – Fall 2009 – Lecture 2

Salary Reduction Agreement: The employer completes part of the form. Each employee receives a copy, and completes the remaining portion of the form, and returns it to the employer. Eligible employees use this form to advise the employer of their rate of elective deferrals or to stop their elective deferrals.

SIMPLE IRA Plan Summary: The employer completes part of the form only. This form provides general information regarding SIMPLE IRA Plans to employees.

Step 2: The employer provides copies to employees at the start of each election period. For existing SIMPLE IRA Plans, the election period is the 60-day period immediately preceding January 1 of the calendar year (November 2 to December 31 of the preceding calendar year).

Example: XYZ Company establishes a SIMPLE IRA plan, effective October 1, 2004. The employer notifies employees regarding the 2004 plan year by providing copies of Appendices A, B and C to employees on or before October 1, 2004. The employer must then notify employees on or before November 2, 2004 for the 2005 plan year and by every November 2 thereafter.

Step 3: An employee (including the business owner if he or she is also an employee) who wants to participate in the plan must complete the Salary Reduction Agreement and return it to the employer. Additionally, the employee must complete a SIMPLE IRA Adoption Agreement, which is found in the SIMPLE IRA Employee IRA Agreement.

Note: Under most SIMPLE IRA document, an employee may elect to establish a SIMPLE IRA Account at another firm that will accept the account. The employer must send monthly salary deferral checks to each financial institution where his or her employees have established their SIMPLE IRA accounts.

Step 4: Each month the employer will send the Financial Institution one check for all of the employees’ salary deferrals for the month. The employer should include a Participant Account Contribution Sheet, specifying the participant allocation of the check.

SIMPLE IRA Eligibility Requirements, Continued

• The 2 year/$5,000 compensation requirement is the maximum Eligibility an employer may require. The employer may elect to decrease the number of years of service or the compensation requirement or both.

For example, an employer can require that an employee worked in one prior year, and made only $3,000 in that year.

• Any Eligibility Requirements the employer sets in the SIMPLE Plan apply to all employees, including the business owner.

For example, an employer started her new business, ABC Corp., on May 31, 2003 and established a SIMPLE IRA Plan effective for 2004. The maximum years of service the employer can require is one year.

What information does financial Institutions usually provide SIMPLE IRA Account owners?

To employees :

• Quarterly Account Statements (statements are sent monthly whenever there is account activity or a Contribution is made to the employee’s account.
• IRS Form 5498 showing total Contribution amounts made during the calendar year and Fair Market Value (year-end account value) of the SIMPLE IRA Account.
• IRS Form 1099-R if a distribution was paid to the SIMPLE IRA Account owner.
• Annual Summary of SIMPLE Plan Rules is sent once a year to all SIMPLE IRA owners.