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SIMPLE contribution - can it be stopped mid year?


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Can an employer stop the SIMPLE match midway during the year? We are getting bombarded with this question from brokers and accountants. Employers are just trying to keep their doors open, and the least of their problems right now is their retirement contribution. They don't want to reduce the match to 1% (IRC 408(p)(2)©), they want to stop it completely. The safe harbor match can be stopped with 30 days notice. What about the [not so] SIMPLE? Plan termination seems to be the only way. Does anyone have any other ideas??

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Generally, No. However, there are two exceptions to amendment and a death punch.

1. A SIMPLE IRA plan can be amended during the election period (generally November 1 to December 31, 2008).

2. A SIMPLE IRA plan can be amended to coincide with the annual notice (the "promise") . E.g. plan states 3% match, annual notice stated 1%, plan can be amended to 1% to coincide with the annual notice.

3. Of couse, making a minimum contributions (say $100) under a non-top-heavy SEP (although a hassle) would invalidate the SIMPLE IRA plan for the year. If this is done, all contributions to the SIMPLE plan become excess contributions (and potentially subject to the 10% nondeductible contribution penalty and 6% excess contribution penalty) unless corrected. The SIMPLE plan could be reestablished when the employer is next eligible.

See IRS.gov - http://www.irs.gov/retirement/article/0,,i...tml#termination

According to the IRS--

When can an employer terminate a SIMPLE IRA plan?

Other than initial establishment, SIMPLE IRA plans are maintained, or not maintained, on a whole-calendar-year basis. Once started for a year, a SIMPLE IRA plan must continue for the entire calendar year, funding all contributions promised in the employee notice. An employer may terminate a SIMPLE IRA plan prospectively, beginning with the next calendar year, after the employer has informed employees that there will be no SIMPLE IRA plan for the upcoming year.

Example: If in 2008 an employer decides to terminate its SIMPLE IRA plan as soon as possible, the employer must inform employees within a reasonable period of time before the 60-day election period ending on December 31, 2008, that there will be no SIMPLE IRA plan for 2009. For 2009 the employer may establish and maintain another kind of qualified plan for its employees and, if this other qualified plan is not operative in 2010, re-establish a SIMPLE IRA plan for 2010.

Hope this helps.

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