The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan option for small businesses that can commit to an annual contribution and for self-employed persons who want to put away more money than an individual IRA allows. The first step to setting up a SIMPLE IRA is to fill out and distribute the adoption agreement. This document defines the parameters under which the plan will operate.
Which Adoption Agreement?
When you set up a SIMPLE IRA, you have two choices when it comes to depositing money: You can preselect the IRA provider, or you can allow employees to select their own provider. If you preselect an IRA provider, the provider is likely to have a template adoption agreement for you to use. If it does not, you can use IRS Form 5305-SIMPLE. If you allow employees to select their own IRA providers, you can use IRS Form 5304-SIMPLE.
SIMPLE IRA Options
There are a few options you need to consider when you fill out the adoption agreement. As discussed, the first option is whether or not you will allow employees to select their own IRA provider, and this determines which adoption agreement you choose. You also must decide whether to use the standard IRS eligibility requirements to determine who receives contributions or whether you'll lower those standards. This may be determined by employment patterns within your business. Although you can lower standards, such as requiring a smaller annual salary to qualify for a contribution, you cannot make them more restrictive. You also must decide whether you'll make a set annual contribution, also known as a non-elective contribution, or match employee contributions.
Employees
Each eligible employee must receive a copy of the adoption agreement when you set up the plan. After the plan is established, you must provide the agreement as the employee becomes eligible. The employees will decide what portion of their pay they would like to defer to the plan, if any, and select an IRA provider if the plan allows that. Employees should also select a beneficiary -- which is the person or entities that will receive the balance of their IRAs if they die.
Modification
If you need to make changes to a SIMPLE IRA, create a new adoption agreement that clearly states that it is a modification of the existing plan. You must notify employees of any changes and provide them with the new adoption agreement at least 60 days before the date the changes become effective. The IRS requires changes to become effective January 1 of a given year. This period is also the time when employees can request changes to their salary deferral amounts.
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