Simple document requirements

[Lori Foresz]

Hi,

I've spent time on several occasions reading and researching and still don't quite understand the plan document requirements for SIMPLE IRAs. It looks like the plan may use an IRS model form, a prototype, or a custom plan. I then read that each participant may establish a SIMPLE IRA account by using the 5305-S.

What exactly does this mean. Does the plan need to have a document for the plan as a whole and then each participant uses the 5305-S as a type of account application? I know that a lot of the SIMPLE provisions cannot be altererd (distribution, vesting, etc) but it would seem that a document would need to exist to select things that can be elected by the employer such as who is eligible (i.e. not non-resident, union) and things like when deferral elections can be changed, etc. It anyone can shed some light on how these things interact in the real world, I would greatly appreciate it.

Many thanks

Lori!

[Gary Lesser]

As you thought, there are two seperate documents that are needed to establish a SIMPLE plan. The employer must establish a SIMPLE plan document and employees making or receiving contributions must establish a SIMPLE IRA arrangement (account or annuity). Documents and arrangements may be model, prototype, or individually designed (of which there are none). Hope this helps.

[Appleby]

I agree with Gary.

To establish the SIMPLE IRA plan, the employer must complete form 5304-SIMPLE or Form 5305-SIMPLE(subject to the designated financial institution rules).

Each employee must complete a SIMPLE IRA adoption agreement which could be a 5305-s, used with banks etc or 5305-SA, used with brokerage firms…therefore, for the employees, the type for SIMPLE form completed depends on the type of financial institution with which the employee’s SIMPLE IRA is established.

For the employers, the choice of form may also be determined by the financial institution with which the employer chooses to establish the SIMPLE IRA Plan. For instance, some financial institutions offers the Form 5305-SIMPLE (For Use With a Designated Financial Institution). An employer that uses the Form 5305-SIMPLE to establish the plan, places certain restriction on the SIMPLE Participants, which is all participant in the plan must establish their SIMPLE IRA with the institution that the employer established the SIMPLE IRA plan. However, the employer must provide notification to the employees to the effect that they may transfer their SIMPLE IRA balances within a reasonable period, to another financial services institution without incurring any penalty. This means that a participant in a 5305-SIMPLE, who wants to maintain his/her SIMPLE IRA at a financial institution, other than the institution that the employer chooses to establish the SIMPLE IRA plan must maintain two SIMPLE IRAs – at least during the two year period…after the two year period, the assets may be transferred to a traditional IRA.

If the employer uses the Form 5304-SIMPLE, employees may establish their SIMPLE IRAs with any financial institution( that offers SIMPLE IRAs). The employer must then send contributions to the financial institutions were the individual SIMPLE IRAs are established.

Some financial institutions may used a SIMPLE prototype form instead of the IRS model 5305 or 5304…

Generally, financial institutions require employees to complete the financial institution’s SIMPLE IRA adoption agreement and provide with it a copy of the employer’s Form 5305 or 5304 SIMPLE.