What is a SIMPLE IRA plan?

A SIMPLE IRA plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis. See IRS Publication 560, IRS Publication 590 and IRS Notice 98-4 for detailed information on SIMPLE IRA plans.

How do I establish a SIMPLE IRA plan?

You establish a SIMPLE IRA plan by visiting a financial institution, adopting a SIMPLE IRA plan document, and setting up SIMPLE IRAs for your eligible employees. There are three basic steps in setting up a SIMPLE IRA plan, all of which must be satisfied.

1. You may establish a SIMPLE IRA plan by adopting an IRS model SIMPLE IRA plan using either Form 5305-SIMPLE (if you require all contributions to be deposited initially at a designated financial institution) or Form 5304-SIMPLE (if you permit each employee to choose the financial institution for receiving contributions). You may also use a prototype SIMPLE IRA plan that has been approved by the IRS. Approved prototype SIMPLE IRA plans are offered by banks, insurance companies, and other qualified financial institutions.
2. You must provide each eligible employee with certain information about the SIMPLE IRA plan and the SIMPLE IRA where contributions for that employee will be deposited. The information must be provided each year prior to the employees' election period. Generally, the election period is 60 days prior to January 1 of a calendar year.
3. A SIMPLE IRA must be set up for each eligible employee. You may use either IRS model Form 5305-S (a trust account) or Form 5305-SA (a custodial account). SIMPLE IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SIMPLE IRA is owned and controlled by the employee and you send the SIMPLE IRA plan contributions to the financial institution where the SIMPLE IRA is maintained.

See IRS Publication 560, the Instructions to Form 5305-SIMPLE and Form 5304-SIMPLE, and IRS Notice 98-4 for information on establishing a SIMPLE IRA plan.

Is there a deadline to set up a SIMPLE IRA plan?

You can set up a SIMPLE IRA plan effective on any date between January 1 and October 1, provided you did not previously maintain a SIMPLE IRA plan. If you previously maintained a SIMPLE IRA plan, you may set up a SIMPLE IRA plan effective only on January 1.

Can a SIMPLE IRA plan be maintained on a fiscal-year basis?

A SIMPLE IRA plan may only be maintained on a calendar-year basis.