How do I Terminate or Freeze a Simple IRA Plan?
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) individual retirement account (IRA) allows employers and employees to make pre-tax contributions that grow tax-deferred. An employee can withdraw from a SIMPLE IRA but still might receive employer contributions. An employer can terminate a SIMPLE plan after giving required notice.
As of 2013, an employee can contribute up to $12,000 of compensation to a SIMPLE IRA. This limit rises to $14,500 for employees of age 50 or older. An employer can make nonelective contributions of 2 percent on the first $255,000 of an employee’s salary. Alternatively, an employer can kick in a dollar-for-dollar match of employee contributions up to 3 percent of the employee’s compensation. Employers can choose either method in a given year, but they must notify employees 60 days before year-end, which is the plan’s “election period.” A plan might have other election periods in addition to the year-end one.
An employee can decline to contribute to a SIMPLE IRA at any time without waiting for an election period. An employee who has stopped contributing will still receive employer nonelective contributions but will not receive matching contributions in subsequent years unless she begins to contribute again. An employee who wants to restart contributions has to wait until the beginning of the next year. An employee can roll a SIMPLE IRA into a traditional IRA tax-free after participating in the SIMPLE IRA for two years.
An employer may decide to discontinue a SIMPLE IRA plan. The decision must be made before the beginning of the year-end election period and doesn't take effect until January 1 of the following year. Some SIMPLE plans use a single custodian to administer the employees’ accounts. If so, the employer will notify the custodian that no further contributions will be made in the following year. The custodian will cancel the SIMPLE plan when the new year begins.
When an employer terminates a SIMPLE IRA without providing a replacement plan, it will distribute each employee's account. Employees might be able to arrange trustee-to-trustee transfers from their SIMPLE IRAs to traditional IRAs. Alternatively, an employee must deposit a distribution check into an IRA within 60 days, or she will have to include the money in taxable income. If the employee is younger than 59 1/2, the Internal Revenue Service will tack on a 10 percent penalty for distributions that are not rolled over.
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