For a Simple IRA Plan, that owes an prior employee a contribution for 2020 – they were terminated in 2020 – how does the employer make the contribution if the prior employee has closed their Simple IRA account and transferred or distributed the account assets?
What if the employee is only receiving $300 and does not want to open/re-open an account. Can the Employer pay them “directly”? Or must the money (the match contribution) go into a Simple IRA account. There does not seem to be a guidance on the IRS site about this?
The employer has no choice but to open a SIMPLE IRA account on the former employee’s behalf and make the contribution. The tax code requires that the contribution be made to a SIMPLE IRA for the former employee.
I have a small business client in this same situation. The employee does not want to open or reopen a SIMPLE IRA to receive the employer’s contribution. The custodian used by other plan participants cannot open a SIMPLE IRA on behalf of the employee without the employee’s signature. Is there a financial institution that will open a SIMPLE IRA on behalf of an employee without the employee’s signature?
Perhaps these institutions are not aware that they can and should open such accounts if they intend to offer SIMPLE IRAs. The following is copied from Notice 98-4.
“Unable to establish a SIMPLE IRA? A. G4: If an eligible employee who is entitled to a contribution under a SIMPLE IRA Plan is unwilling or unable to establish a SIMPLE IRA with any financial institution prior to the date on which the contribution is required to be made to the SIMPLE IRA of the employee under Q&A G5 or G6, an employer may execute the necessary documents to establish a SIMPLE IRA on the employee’s behalf with a financial institution selected by the employer.”
Thank you so much for the reference! I’ll follow up with the financial institution regarding Notice 98-4.
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-22 17:03
The employer can open a new SIMPLE IRA account or perhaps reopen the closed account to make the contribution.
Permalink Submitted by Jerome Pasichow on Mon, 2021-02-22 18:54
What if the employee is only receiving $300 and does not want to open/re-open an account. Can the Employer pay them “directly”? Or must the money (the match contribution) go into a Simple IRA account. There does not seem to be a guidance on the IRS site about this?