SIMPLE IRAs - Changing Employer Contributions

Time to get technical.

IRS has a free newsletter called Employee Plans News. In the latest issue they answer a question from an employer with a SIMPLE IRA plan. (For more information on SIMPLE IRAs, see IRS Publication 560 available at http://www.irs.gov/.)

Contributions to SIMPLE IRAs come from employee salary deferrals and employer contributions. An employer can choose to make “nonelective” contributions of 2% of compensation for eligible employees. The employer must timely notify employees of the employer contribution.

The question submitted to IRS was if an employer can skip the nonelective contribution for the year or if they can terminate the plan before the end of the year. Presumably the business is having financial difficulties.

The IRS response was that the employer cannot skip the nonelective contribution for eligible employees. An employer also cannot terminate a SIMPLE plan in mid-year. IRS notes that SIMPLE IRAs are whole-calendar year plans and must continue for the entire year and pay in all promised contributions. The plan can be terminated prospectively, for the upcoming year, after giving its employees the proper notification. Employers must remember that their retirement plans come with rules and that the rules of the plan must be followed.

-By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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