SIMPLE IRA eligibility applies to all employees?

Submitted by Jack Thomas on Thu, 2016-10-06 22:09

Scenario: Employer is delivering the SIMPLE IRA annual notification this month (for 2017 plan year) and making changes to the eligibility requirements from having to work for 2 years to only having to work for 1 year. The question is do the new rules apply to only employees hired in 2017 or do the changes apply retroactively to employees hired in 2016 and before? Custodian is insisting that employees hired in 2016 are subject to the plan rules of 2016 and will have to wait two years before entering the plan while employees hired in 2017 will only have to wait one year.

And a follow up question, could an employer do a fraction of a year for an eligibility requirement like 6 months? Or are the only options 2 years, 1 year and immediately eligible? So in this follow up question scenario, say the employer has a 6 month period of time before new employees are eligible and someone starts work in January 2017, could they then enter the plan in June of 2017 or will they have to wait for the beginning of the following calendar year no matter what?

Thank you for your help regarding these plans that are sometimes not so “simple.”



Submitted by Alan - IRA critic on Fri, 2016-10-07 04:35

  • An employer can change the qualification rules annually, but at a risk of alienating certain employees. The annual Notice goes out to all employees and applies to all employees, otherwise the notice would apply differently to different employees and special notices would have to go out to some employees. A SIMPLE IRA should be simple, and not contain such complexity. Therefore, employees hired in 2016 with enough earnings would be eligible in 2017 if eligibility was changed from 2 to 1 year.
  • The annual notification form contains reference to only calendar year periods, and for purposes of qualification the employer could use the W-2 forms. While Notice 98-4 allows the eligibility period to be 0, trying to use 6 months would create several problems, although the Notice does not specifially comment. For example, if a 6 month period was used, the W-2 would not be useful. and the 6 months would have to be defined to periods ending on 6/30 or 12/31 otherwise the employee could state they earned the required amount from March-August or any other consecutive 6 month  period. Try to deviate from the calendar year would create all kinds of problems, and I doubt it would be approved by the IRS.

Submitted by Jack Thomas on Fri, 2016-10-07 11:38

Thank you.  I really appreciate your help.  One further question on point number one, while what you are saying makes sense logically, is there any IRS documentation I can point the custodian to if they are refuse to see it this way?

Submitted by David Mertz on Fri, 2016-10-07 13:36

  • The standard 5304-SIMPLE and 5305-SIMPLE based plans apply equally to all employees; these forms provide no wording to indicate otherwise.  A company with a SIMPLE plan can only have one plan (ignoring any separate plan for collective bargaining employees), so any change to the SIMPLE plan supersedes the previous plan, as if the previous version of the plan never existed.  It’s possible for a custodian to develop a prototype plan that must be approved by the IRS, not based on one of these standard forms, but I doubt that the IRS would approve the plan if it provided different eligibility standards for different employees.
  • Why would it matter if the custodian refuses to see it this way?  It’s the employer’s responsibility to determine which employees are eligible, not the custodian’s.

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