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New SIMPLE plan effective July 1 2007


rfahey
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If a client desires to start a new SIMPLE IRA plan effective 7/1/07 is the plan compensation for matching purposes only used from 7/1/07 to 12/31/07 ?

In other words in this first year of the plan ( 2007 ) is 3% of compensation from 7/1/07 ( not 1/1/07 ) to 12/31/07 the highest cost that a sponsor can incur regardless of deferrals from employees this year?

The fund companies are not willing to answer this question.

Thank you !

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If a client desires to start a new SIMPLE IRA plan effective 7/1/07 is the plan compensation for matching purposes only used from 7/1/07 to 12/31/07 ?

In other words in this first year of the plan ( 2007 ) is 3% of compensation from 7/1/07 ( not 1/1/07 ) to 12/31/07 the highest cost that a sponsor can incur regardless of deferrals from employees this year?

The fund companies are not willing to answer this question.

Thank you !

My understanding is that you must use the full year compensation. I believe this information can be found in the description of compensation contained in the IRS website for SIMPLE plans. I had researched this issue for a plan that started mid-year in 2006 but do not have the references handy.

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  • 2 weeks later...

There is no short term compensation period ? Ok, but how about (the following) somewhat different situation

How about if the employer has a calendar year PSP that will terminate on 06/30/07. And then the employer's new calendar year Simple plan will be effective on 07/01/07.

That would mean that compensation for the period 01/01/07 - 06/30/07 will be allowed as "eligible compensation" for both the PSP and the Simple.

I thought that you cannot maintain a simple if you also maintain another plan.

Although the PSP and Simple will not be maintained at the same time .... is there a problem with the "same" eligible comp ( 01/01/07 - 06/30/07) being applicable to both plans ?

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Yes, there's a potential problem. One of the requirements for eligibility is that the employer does not "...maintain during any part of the calendar year another qualified plan with respect to which contributions are made, or benefits accrued, for service in the calendar year." (My emphasis)

So if a contribution is made for the PS plan year ending 6-30-07, this requirement isn't satisfied, and they cannot have a Simple plan for 2007.

If there are no contributions to the PS plan, then you aren't using the "same" compensation twice, and therefore you should be fine for a Simple plan beginning 7-1-07.

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I'm having second thoughts.

Since this is a new Simple plan, then it appears to me (after reading the 5305-Simple instructions) that you CAN HAVE a short plan year (but only for a new plan).

The "effective date" section of the instructions says that if it is a new simple plan then the "effective date" does not have to be January 1.

It's my befief that neither employee elective deferrals, nor employer match, nor employer contributions can be based on compensation arising prior to the effective date of the plan. So, a new plan that "chooses" an effective date of 07/01/07 .... not only was not in effect on January 01, 2007 .... but also, none of the 2007 compensation arising before 07/01/07 can be used in computing any of the employee or employer contributions.

if I'm wrong, then what is the purpose of being allowed to choose an effective date other than January 01 ?

The plan will start its full 12-month calendar year cycle on 01/01/08, but a short plan year existed from 07/01/07 - 12/31/07.

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Well, perhaps one of the true SIMPLE gurus like Gary Lesser will chime in at some point, but IMHO...

I think the effective date provision is to specifically allow either plans for new new employers, or new plans for existing employers, to be instituted after the beginning of the calendar year.

As far as deferrals, I agree that you can't defer (for W-2 employees) based upon compensation prior to the effective date of the plan. However, I'd say that for the employer match, which is dollar for dollar up to 3% of compensation, that this compensation would be besed upon the ENTIRE calendar year compensation, and not limited to comp during the "short" initial year.

I don't see any way around this.

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I must agree with Belgarath.

At one time, it was unclear whether compensation earned before a new SIMPLE IRA plan’s effective date might be ignored or had to be prorated. Which course of action applies is important in determining the amount of compensation that is considered by the employer in making its contribution. IRS guidance now provides that nonelective and matching contributions are based on compensation “for the entire calendar year.” In general, the effectve date is the date that the provisions of the plan become effective. I do not see any wiggle room that would allow for, or require proration, in the case of a "short year." A SIMPLE-IRA must be maintained on a calendar year basis (see IRC § 408(p)(6)©) .

[i.R.S.Notice 98-4, 1998-2 I.R.B. 26; I.R.C. §§401(a)(17), 408(p)(6)(A); Treas. Reg. §1.401(a)(17)-1(b)(3)(iii)(A)]

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