SIMPLE IRA eligibility Question
I have a client who owns a staffing firm. They hire Temporary employees (not 1099). Most of them work less than a year, but some of them will work for more than a year. I’m having trouble with the eligibility rules…. The second part of the 5305 form states this:
Prior compensation. Employees who have received at least ____ in compensation (not to exceed $5,000) during any ___calendar year(s) (insert 0, 1, or 2) preceding the calendar year.
I was told by my custodian (TD Ameritrade), they interpreted the SIMPLE IRA eligibility rule as this: Because it says “any” calendar year, this means that 2 years is actually less restrictive than the 1 year. The custodian informed me that this means the employee could work for a year, earn 5k, and come back to the employer and be eligible for the plan…. because they earned 5k in “any” of the preceding 2 years.
Does the rule mean the employee must work for 2 years before coming eligible for the SIMPLE plan? Or if I insert 2, does it mean they would be eligible for the plan if they worked for a year? The rule says in “ANY” 2 preceding calendar years… The ANY is getting me confused.
I would like to implement a Simple IRA plan for my client, but I need to know if the employees must work there and make 5k for 2 years prior to becoming eligible. OR does the rule mean any of the previous 2 years – which essentially is 1 year.
For example:
Employee works in 2016 and makes 8k. If I selected 2 year eligibility, does this mean the employee would be eligible in 2017 for the Simple IRA? OR, would they have to work in 2017, make 5k, and THEN become eligible in 2018?
Permalink Submitted by David Mertz on Fri, 2017-11-17 21:34
The TD Ameritrade rep’s interpretation doesn’t make sense. USC section 408(p)(4)(A)(i) says:
The IRS interprets this to be the most restrictive eligibility requirement permitted, but also that a less restrictive eligibility requirement is allowed. Given that the Form 5305-SIMPLE allows the entry of either 0 or 1 instead of 2, specifying 0 or 1 *must* be interpreted as being less restrictive than specifying 2 (otherwise specifying 3 would be less restrictive and would have to be included as an alternative, as would all larger numbers, and 0 and 1 could not be listed). I also found that the “U.S. Master Tax Guide” published by a Wolters Kluwer company interprets 408(p)(4)(A)(i) as meaning “received at least $5,000 in compensation from the employer during *each of* any 2 preceding years.”
Permalink Submitted by David Mertz on Fri, 2017-11-17 22:33
Further, interpreting 0 as being more restrictive than 2 produces nonsense. It’s impossible for an employee to receive some nonzero amount of compensation in zero service time.