SIMPLE IRA, setting up plan mid-year, any potential issues?
Hi
Are there any potential issues when a SIMPLE IRA is set up mid year (say May 2013 for example) in which the employer would have to make any back contributions for employees? Have heard of an administrator who is telling the employer they have to go back and make contributions for employees dating back to Jan 2013.
If plan was set up May 2013 and employees were given the proper notifications and allowed into plan May 2013, then my understanding is there is no requirement to fund any “back” contributions on behalf of the employees. Is that correct?
Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2013-05-23 18:18
See final paragraph regarding timing here: http://www.irs.gov/Retirement-Plans/Establishing-a-SIMPLE-IRA-PlanIt appears that any back dating is not allowable.
Permalink Submitted by Jack Thomas on Thu, 2013-05-23 18:34
what about the employer matching contributions. Say the employer wants to do 3% match of salary contributions for employees and sets the plan up mid year. Does the employer have to go back and match 3% of contributions for salaries that amounts to 3% of the employees salary for the entire year? Or is it 3% of employee contributions going forward based on the amount they decide to contribute when they enter in the plan mid year.Say for example, employee makes 100,000 per year but enters the plan in June and contributes funds into the plan for the remainder of the year. does the employer have to go back and match and bring the total up to 3,000 for the year even though the employee never contributed anything during the first 6 months of the year?
Permalink Submitted by Alan - IRA critic on Thu, 2013-05-23 19:21
No, the match only applies to salary earned after adoption of the plan.
Permalink Submitted by Jack Thomas on Thu, 2013-05-23 22:06
Employer was just told by payroll company that the match is based off gross compensation no matter when you start the plan. Is there any documentation I can point the employer to telling him this is not the case? In above example, employee enters plan mid year, makes 100k a year and if the employee is putting away 6% of their salary (3,000 through the remainder of the year), payroll company is telling employer he has to match that 6% by 100% (making up 3% or 3,000 of overall compensation). Payroll company also telling the employer he can do the same thing with his own contributions and having him match his contributions based on 3% of his gross annual contribution even though he is starting the plan mid year. In other words, payroll company is telling employer he can put away a total of $17,500 for himself for 2013 even though he is starting the plan mid year ($12,000 payroll deduction, plus $2500 catch up plus $3000 matching based off 100k annual salary).Alan, based on my understanding of your reply, it seems the employer can only contribute as a match $1500 (3% of half 100k annual salary) if he starts the plan mid year. Is that correct? What documentation can I direct the employer to to review?Thanks, you’ve been really helpful.
Permalink Submitted by Alan - IRA critic on Thu, 2013-05-23 23:37
There is an indication in Notice 98-4 that the match must be based on the salary for the entire year, but it is not clear whether this indication contemplates a typical calendar year plan only or applies to plans adopted mid year. What plan did this employer maintain earlier in 2013, and did employer maintain a SIMPLE IRA previously? What payroll date is the first date that salary reduction contributions can be made? Has employer already committed to the 3% match, or if the administrator is requiring the match (but not the salary reduction contributions) to go back to 1/1 is their time to reduce the match to 2% or 1%?
Permalink Submitted by Jack Thomas on Thu, 2013-05-23 23:47
AlanTo be exact, I believe the first payroll date the salary reductions could be made was towards the beginning of May 2013, possibly May 1. As far as I know the employer did not maintain any plan earlier in 2013 and has never had a SIMPLE. With the plan set up already, I’m guessing it’s too late and they are committed to the 3% match. Do you have any idea if there is any flexibility here or are they stuck for the rest of the year? It’s possible the employer would go down to 1% if they still had time since the administrator is requiring them to use 1/1 in the calculation of the overall match. Based on what you’re saying it sounds like they are kind of at the mercy of the administrator and how the administrator interprets how the 3% match is calculated. Or is there anything that the employer might suggest to their administrator as to how these matching amounts are calculated?Thanks again!
Permalink Submitted by Jack Thomas on Thu, 2013-05-23 23:47
AlanTo be exact, I believe the first payroll date the salary reductions could be made was towards the beginning of May 2013, possibly May 1. As far as I know the employer did not maintain any plan earlier in 2013 and has never had a SIMPLE. With the plan set up already, I’m guessing it’s too late and they are committed to the 3% match. Do you have any idea if there is any flexibility here or are they stuck for the rest of the year? It’s possible the employer would go down to 1% if they still had time since the administrator is requiring them to use 1/1 in the calculation of the overall match. Based on what you’re saying it sounds like they are kind of at the mercy of the administrator and how the administrator interprets how the 3% match is calculated. Or is there anything that the employer might suggest to their administrator as to how these matching amounts are calculated?Thanks again!
Permalink Submitted by Alan - IRA critic on Fri, 2013-05-24 02:57
You are correct that it appears that the administrator’s interpretation of the required matching contribution is going to determine the de facto requirement here since there is no clear evidence I can find to refute their interpretation. The 3% match using the full CY salary will result in a higher matching contribution than otherwise.
Permalink Submitted by Jack Thomas on Fri, 2013-05-24 18:21
Thank you. Once again, extremely helpful.