The IRS has been busy auditing SIMPLE IRA plans and discovering a great deal of noncompliance as far as whether or not the plans have been properly amended for EGTRRA. At a recent Mid-Atlantic Pension Liaison meeting, IRS announced their intent to notify all 190,000 employers across the country who maintain SIMPLE IRA plans in an effort to motivate employers to get the amendments done. However, practitioners at the meeting were concerned about the effectiveness of notifying employers when, in fact, providers for the most part are the ones who should be supplying these updated documents.
In a Special March 10, 2006 edition of Employee Plan News, the IRS has formally announced this SIMPLE IRA compliance effort but now adds that it will also be sending letters to the “approximately 185 drafters of prototype SIMPLE IRA plans.” While this is a welcome change in the initiative, IRS will still be notifying all 190,000 employers, to the tune of 10,000 to 15,000 letters per week, the newsletter says, which could generate a lot of questions for practitioners when employers receive these letters. (Access the letter that will be sent to employers here and the letter that will be sent to drafters of prototypes here.)
What is the trick to helping employers find out if their plans are in compliance? The letters provide some tips for employers and practitioners in determining whether or not the plans are in compliance:
- If the employer is using IRS model forms, the model form is in compliance if the revision date of the form is either March 2002 or August 2005.
- If the employer is using a prototype issued by a financial institution or other institution, the prototype is likely in compliance if the issue date or most recent revision date is after April, 2002.
What is the fix for the employer if the documents have not been updated? For those employers using IRS model forms, they should obtain up-to-date model forms on the IRS website (Form 5304-SIMPLE–Not for Use With a Designated Financial Institution and Form 5305-SIMPLE–For Use With a Designated Financial Institution) and complete and sign them by December 31, 2006. For those employers using prototype documents, they should notify, i.e. bug, their providers until they send them new forms to complete. The IRS notes that, as to employers who use prototype documents, if for some reason the provider fails to supply the updated documents, the employer can always switch to updated IRS model forms, which will also bring the plan into compliance. (However, the employer should probably have an attorney review both documents to make sure there are not any unintended consequences in making the switch.)
The IRS notes that, even though the deadline has passed for making the EGTRRA amendments, employers will now have a grace period for making the amendments which will end on December 31, 2006. This grace period is important because if an employer fails to update the documents for EGTRRA on or before the December 31, 2006 date, the newsletter reminds employers that the plan could be disqualified:
Plans not in compliance with this requirement could lose all the retirement savings and tax benefits that these plans provide to both the employers sponsoring them and the employees participating in them.
(A SIMPLE IRA plan is an IRA-based plan that provides small employers with a simplified method for making contributions towards their employees’ retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity set up for each employee. SIMPLE IRA plans may be established only by employers that have no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year. Learn more about the changes made to SIMPLE IRAs under EGTRRA here. Learn more about SIMPLE IRAs here.)