Rehired employee

[Jeff]

have a part time employee who earned more than $5000 in 2015 and 2016 but was not employed by us on January 1, 2017.  our first plan year started January 1, 2017.  It was reasonable to say that the employee was not expected to earn $5000 for 2017 since he was not employed by us.  We did rehire the person in March and is expected to be with us until the end of the year.  Is this person eligible to join the plan or is the eligibility only established as of January 1, 2017.

[Bird]

That's a good question.  I'd vote for him being eligible.

[Belgarath]

Well, first things first. Is this a SEP, or a SIMPLE? SEP's can have three year eligibility, SIMPLE's only two year. Then, what eligibility requirements did you choose? If we assume either a SIMPLE, or a SEP with less than 3-year eligibility, then I'm with Bird. I interpret the "reasonably expected" language in the SIMPLE document to mean "reasonably expected" as of the rehire date.

[Gary Lesser]

It is a SIMPLE plan and a very interesting (not simple) question. Although the term "reasonably expected" is not defined, it does seem to suggest that a determination of eligibility can be made before the end of the year.  Absent a clear reading of the law, I do not think the Service would raise the issue unless there were some nefarious intent on the part of the employer making the determination.  IMO, the employer should be able to determine who eligible employees are on the first day of the calendar-plan year  (rather than on rehire date), assuming the 60-day notifications were made timely, and that this would be the intent of the law.  This also begs another query; whether a rehired employee has to be given a special 60-day notifications(?) -- I think not.

On the other hand, including the employee is unlikely to cause a problem upon audit; and is likely to be far less costly than a private letter ruling and/or correction under the EPCRS.

Hope this helps and I welcome other opinions.

From IRS Notice 98-4

"Q. C-1: Which employees of an employer must be eligible to participate under the SIMPLE IRA Plan?

"A. C-1: 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."

[Gary Lesser]

On second thought (sorry it took so long), I think the rehired employ should be given notices and allowed to participate in the year of rehire.

In certain situations, the requirement that specific information, notices, and elections regarding a SIMPLE be given before the beginning of the 60-day period for making or modifying a salary reduction election may be waived. Such situations include instances when an employee becomes an eligible employee other than at the beginning of a calendar year because

1.       The plan does not impose a compensation requirement for prior years;

2.       The employee satisfied the plan's compensation requirement for prior years during a prior period of employment with the employer; or

3.       The plan is first effective after the beginning of a calendar year.

[I.R.C. §§408(l)(2)(C)]

     If any of the foregoing circumstances apply, the eligible employee must be permitted to make or modify a salary reduction election during the 60-day period that begins on the day plan notice is provided to the employee and that includes the day the employee becomes an eligible employee or the day before. By allowing the 60-day period to start on the day plan notice is provided to the employee (instead of on the next day), a rehired employee, for example, will not have to wait until the following year to become eligible. Thus, in this case, the salary reduction election will become effective as soon as practical after receipt by the employer (or, if later, the date specified by the employee in the salary reduction agreement) but any election made by the eligible employee may be modified prospectively any time during the 60-day period. It would be impractical to require notice before the date of eligibility in such situations because that day or the identity of the employee, or both, is not always known. [See SIMPLE IRA plan LRM §§6–7 (Apr. 2005)]

     These rules would most likely also apply to adopters of model plans.

[SIMPLE LRM - attached]

Example. Stacy was a participant in her employer's SIMPLE IRA plan until she severed her employment in January 2021. On May 1, 2021, Stacy was rehired and provided notice of the opportunity to make a salary reduction election. The 60-day period that started on May 1 includes the day Stacy became an eligible employee (May 1, 2021). If it were not for the special rule, the 60-day period could not start until May 2 and thus could not include the day Stacy became eligible (May 1) or the day before (Apr. 30). Therefore, Stacy would have to wait until the following year to participate (i.e., the first year for which the 60-day period could include the day she became an eligible employee for that year or the day before).

     In all cases, the salary reduction agreement should become effective as soon as practical after receipt by the employer (or, if later, the date specified by the employee in the salary reduction agreement), but any election made by the eligible employee may be modified prospectively at any time during the 60-day period. Hope this helps.

simpleplan_lrm.pdf