Requiring Participation in SIMPLE IRA

[holdco]

I have been circling this topic forever and I can't seem to pin down an answer.

Say a small business owner sets up a SIMPLE with the the 3% matching contribution. He has 6 employees, none of whom want to participate in the SIMPLE. The employer says fine, sets up an account only for himself, and contributes the maximum with match. Is this permissible or not? The way I read the IRC and the DOL Notice 98-4, as well as the IRS FAQs below, an employer must enroll the employees so that they have a plan, but if they contribute zero, great, their accounts will reflect that. The employer has a son who passed the bar this year, has been licensed for 8 months, and is saying there's no need to set up any accounts for the employees if they don't want to participate.

Who is correct? If anyone could send me any evidence or authority to their answer, I would be eternally grateful. This simple issue is driving me nuts! Thank you!!

FAQs

Which employees of an employer must be eligible to participate under a SIMPLE IRA plan?

If an employer establishes a SIMPLE IRA plan, all employees of the employer who received at least $5,000 in compensation from the employer during any 2 preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, must be eligible to participate in the SIMPLE IRA plan for the calendar year. If an employee meets the conditions described in this paragraph (or such lesser conditions imposed by an employer) and is not excluded, then the employee must be covered by the SIMPLE IRA plan.

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May a participant "opt out" of a SIMPLE IRA plan?

An employee may not "opt out" of participation. Of course, any eligible employee may choose not to make salary reduction contributions for a year, in which case such employee would accrue no employer matching contributions for the year, but would receive an employer nonelective contribution for the year if the plan provides for such contributions for the year.

[Jim Chad]

I do not see any need to open an account and have a zero balance. If he has been given the option to defer, he is "covered". It is perfectly ok for any or all employees to choose to defer -0- for now.

As far as a good paper trail if audited....I would want each employee to sign a form saying they have chosen to defer 0. And I may even want the form to state that they understand they will not receive the match if they don't defer.

MY opinion FWIW

[Bird]

I do not see any need to open an account and have a zero balance.

I agree. Just make sure you have an election form on file saying they don't want to contribute.

[holdco]

I do not see any need to open an account and have a zero balance.

I agree. Just make sure you have an election form on file saying they don't want to contribute.

Thanks so much! I guess that makes sense, but the language of the Notice and the IRS FAQ suggests otherwise. You have to go through a tortuous use of the words "entitled" and "eligible" in order to conclude they don't need an account. What a pain.

[masteff]

I think the original notion might have been a slight misinterpretation of Notice 98-4, Q&A G-4. The employer only establishes an account if the EE is entitled to a contribution and refuses to set up an account. And note the words "may execute", not "must execute"

Q. G–4: What if an eligible employee is unwilling or unable to establish a SIMPLE IRA?

A. G–4: If an eligible employee who is entitled to a contribution under a SIMPLE IRA Plan is unwilling or unable to establish a SIMPLE IRA with any financial institution prior to the date on which the contribution is required to be made to the SIMPLE IRA of the employee under Q&A G–5 or G–6, an employer may execute the necessary documents to establish a SIMPLE IRA on the employee’s behalf with a financial institution selected by the employer.

http://www.irs.gov/pub/irs-irbs/irb98-02.pdf

EDIT: it's also discussed in Q&A K-2

Q. K–2: When must a SIMPLE IRA be established for an employee?

A. K–2: A SIMPLE IRA is required to be established for an employee prior to the first date by which a contribution is required to be deposited into the employee’s SIMPLE IRA (see Q&As G–5 and G–6).