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Eligibility for a SIMPLE IRA


Guest Jensen
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Guest Jensen

I have a client who would like to have a three month "waiting period" before new employees are eligible to participate in the SIMPLE plan. I can't find any eligibility requirements other than the minimum compensation and can't find anything that would allow this length of waiting period, but feel like I might be missing something.

The way I am interpreting the rules, an employer can have a one or two year "waiting period" by requiring that the employee earn $5,000 (or some lesser amount) during either the one or two years prior to the plan year in which the employee is eligible to participate. The employer could also waive the prior year compensation minimum, but require that the employee be "reasonably expected to receive $X (not to exceed $5,000) in the current year." I interpret that to mean that as long as the employee is expected to earn the minimum amount (based on rate of pay and/or # of hours scheduled), the employee is eligible to begin participating in the SIMPLE as soon as he/she is hired.

It would be easy enough to figure out what is the average earnings for three months and set that as the minimum compensation for the current year and in effect have a three month (give or take) "waiting period" if the current year minimum must actually be earned before the employee is eligible to participate, but I don't think that is what is intended.

Any thoughts on this? Have I missed something that would allow the employer to set a "waiting period" of less than 1 year before employees are eligible to participate?

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IRS Notice 98-4

Q & A C-2 Reproduced below seems to answer your question.

Q. C-2: May an employer impose less restrictive eligibility requirements?

A. C-2: An employer may impose less restrictive eligibility requirements by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both, under its SIMPLE IRA Plan. For example, the employer could allow participation for employees who received $3,000 in compensation during any preceding calendar year. However, the employer cannot impose any other conditions on participating in a SIMPLE IRA Plan.

JEVD

Making the complex understandable.

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Guest Jensen

That's what I thought. I don't see that it can be done, but I feel like I might be missing something because the client has already been doing this informally -- it only became an issue when the client changed financial institutions, and the new FI told them they needed to amend their plan (Form 5304) so that the 90 day waiting period was actually in writing. I guess I'm doubting my conclusion b/c I don't understand why the FI told them they needed an amendment rather than telling them they couldn't do this. Of course, it is possible that the FI told them they needed to talk to an attorney to see whether it could be done, and if so, the attorney needed to draft an amendment, and the client simply lost the first part in translation :rolleyes:

In the meantime, I've been trying to figure out a way that the employer could use a minimum compensation requirement to effectuate the 90 waiting period, but I don't see any way for that to work.

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