Impact of changing from a non-DFI to a DFI plan

[Guest Richard Plant]

When SIMPLE IRA assets are invested in an investment that has a surrender charge (an early withdrawal penalty), upon withdrawal the surrender charges may or may not be deducted based on the type of SIMPLE plan:

 Surrender charges would be applicable if the SIMPLE plan was a Form 5304-SIMPLE (non-DFI SIMPLE – a plan in which each employee designates the financial institution for which new contributions are directed to).

 Surrender charges would not be applicable if the SIMPLE plan was a Form 5305-SIMPLE (DFI SIMPLE – a plan in which the employer designates the financial institution for which new contributions are directed to).

What if the SIMPLE plan changes from a 5304 to a 5305?

 A Form 5304-SIMPLE plan is established by an employer.

 Bob, an employee, directs a total of $5,000 to the “High Cost Trustee. Inc.” (a designated financial institution chosen by Bob).

 Bob invests in the “High Cost Fund” which is subject to a 7% surrender charge if funds are withdrawn in the first 3 years.

 A year later the employer decides to change to a Form 5305-SIMPLE plan and the employer selects the “High Cost Trustee. Inc.” as the designated financial institution.

 An additional $5,000 in SIMPLE contributions are directed to the same account (Bob’s SIMPLE account at “High Cost Trustee. Inc.” invested in the “High Cost Fund”).

1) Bob decides to transfer his entire SIMPLE IRA to another SIMPLE IRA at a new financial institution. Is Bob subject to any surrender charges (or just surrender charges on the portion that was invested when the plan was a 5304-SIMPLE) and who keeps track of each contribution – the trustee?

What if the SIMPLE plan changes from a 5305 to a 5304?

 A Form 5305-SIMPLE plan is established by an employer.

 Bob, an employee, directs a total of $5,000 to the “High Cost Trustee. Inc.” (a designated financial institution chosen by the employer)

 Bob invests in the “High Cost Fund” which is subject to a 7% surrender charge if funds are withdrawn in the first 3 years.

 A year later the employer decides to change to a Form 5304-SIMPLE plan and Bob tells his employer he to keep sending the new contributions to the “High Cost Trustee. Inc.” as the designated financial institution.

 An additional $5,000 in SIMPLE contributions are directed to the same account (Bob’s SIMPLE account at “High Cost Trustee. Inc.” invested in the “High Cost Fund”).

2) Bob decides to transfer his entire SIMPLE IRA to another SIMPLE IRA as a new financial institution. Is Bob subject to surrender charges on the entire account (or just surrender charges on the portion that was invested when the plan was a 5304-SIMPLE) and who keeps track of each contribution – the trustee?

[Gary Lesser]

A transfer of a participant’s SIMPLE IRA balance is deemed to be made without cost or penalty if no liquidation, transaction, redemption, or termination fee or any commission, load (front-end or back-end), or surrender charge or similar fee or charge is imposed with respect to the balance being transferred. A transfer will not fail to be made without cost or penalty merely because contributions that a participant has elected to have transferred without cost or penalty are required to be invested in one specified investment option until transferred, even though a variety of investment options are available with respect to contributions that participants have not elected to transfer.

If an amount is transferred to a DFI arrangement, the without cost or penalty provisions in the DFI arrangement, would apply to the amount transferred from the first SIMPLE-IRA.

See Notice 98-4, Q&A J-4 (1998-2 IRB 26) and examples therein

Hope this helps.