SIMPLE IRA

Ashgrove Dental adopts a SIMPLE IRA for its fourteen employees. The owner is told she must choose between two employer contribution formulas for the year. Only four of the fourteen employees actually elect to defer any pay. Which pair of formulas is she choosing between, and how does the choice affect the ten non-deferring employees?

1. A.A three percent match or a three percent nonelective contribution; either way all fourteen employees receive a contribution.Wrong on the nonelective percentage and on the effect of the match. A match reaches only those who defer.
2. B.A discretionary profit-sharing contribution or a fixed money purchase contribution, with the ten non-deferring employees covered under either.Wrong. Those are formulas for qualified defined contribution plans, not the two statutory SIMPLE IRA employer formulas.
3. C.A dollar-for-dollar match up to three percent of compensation, which gives the ten non-deferring employees nothing, or a two percent nonelective contribution, which covers all fourteen regardless of deferral.Correct. The match rewards only participants; the nonelective contribution reaches every eligible employee whether or not they defer.
4. D.A two percent match or a three percent nonelective contribution, with the non-deferring employees covered only under the match.Wrong. The percentages are reversed, and the match is the formula that leaves non-deferring employees with nothing.

Why: A SIMPLE IRA employer must choose annually between two contribution formulas. Under the MATCHING formula the employer matches employee elective deferrals dollar for dollar up to three percent of the employee compensation; because it is a match, an employee who defers nothing receives nothing. Under the NONELECTIVE formula the employer contributes two percent of compensation for every eligible employee, whether or not that employee defers anything at all. The choice therefore has a very different cost profile depending on participation: with only four of fourteen deferring, the match is far cheaper, while the nonelective formula would require a contribution for all fourteen. Employees must be notified of the formula chosen before the election period for the year.

Renata Ferreira sponsors a SIMPLE IRA for her landscaping business and asks her representative what she, as employer, is obligated to put in each year. Under the standard SIMPLE IRA rules, the employer must choose between:

1. A.A matching contribution in profitable years, OR no employer contribution at all in a year the business loses money.Wrong. The SIMPLE employer contribution is mandatory. Skipping it in a lean year is a feature of a discretionary profit-sharing plan, not a SIMPLE.
2. B.A contribution equal to 25 percent of each employee's compensation, OR an equivalent contribution to a SEP established alongside the SIMPLE.Wrong. The 25-percent-of-compensation figure relates to SEP contribution limits, and an employer generally may not maintain another qualified plan alongside a SIMPLE.
3. C.A dollar-for-dollar match of employee deferrals up to 3 percent of compensation, OR a 2 percent nonelective contribution for every eligible employee whether or not that employee defers.Correct. These are the two standard SIMPLE IRA employer formulas. The match rewards only those who defer; the nonelective contribution goes to everyone eligible.
4. D.A 2 percent match of employee deferrals, OR a 3 percent nonelective contribution for every eligible employee.Wrong - the percentages are swapped. The match is up to 3 percent; the nonelective contribution is 2 percent.

Why: A SIMPLE IRA requires an annual employer contribution, and the sponsor picks one of two standard formulas. The first is a dollar-for-dollar MATCH of each participating employee's elective deferrals, up to 3 percent of that employee's compensation - so an employee who defers nothing receives nothing. The second is a 2 percent NONELECTIVE contribution made for every eligible employee, paid whether or not the employee defers anything. The employer cannot simply skip the contribution in a bad year, which is the main way a SIMPLE differs from a discretionary profit-sharing plan.

A customer recently established a SIMPLE IRA through her employer. She wants to move those funds to a traditional IRA at a different firm shortly after the account was opened. How does a SIMPLE IRA differ from an ordinary traditional IRA regarding this kind of early movement?

1. A.A SIMPLE IRA carries its own restriction on moving funds to a non-SIMPLE IRA during an initial period after the account is first established, a restriction that does not apply to transfers between ordinary traditional IRAs.Correct. A SIMPLE IRA has an early-period restriction on transfers to a non-SIMPLE IRA that a traditional IRA does not carry.
2. B.There is no difference; a SIMPLE IRA is transferred using exactly the same rules as a traditional IRA at every stage of its existence.Wrong. A SIMPLE IRA carries its own early-period restriction that an ordinary traditional IRA does not have.
3. C.A SIMPLE IRA can never be moved to a different custodian under any circumstances, unlike a traditional IRA, which may be transferred freely.Wrong. A SIMPLE IRA can be moved to a different custodian; the restriction applies specifically to moving it to a non-SIMPLE IRA during an initial period.
4. D.The restriction applies only to withdrawals for the account owner's personal use, not to institution-to-institution transfers of any kind.Wrong. The restriction specifically applies to moving funds to a non-SIMPLE IRA, which includes institution-to-institution transfers.

Why: A SIMPLE IRA is not identical to an ordinary traditional IRA for transfer purposes in its earliest period. It carries its own restriction specifically limiting movement of funds to a non-SIMPLE IRA during an initial period right after the account is established, a limitation that has no counterpart for transfers between ordinary traditional IRAs, which may be moved freely between custodians at any time.