Simple IRA and non contributing employee

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drramey
Posts: 37
Joined: Sun May 16, 2021 12:00 am

Simple IRA and non contributing employee

Post by drramey »

I have a small business with three employees. One of which is new and will be qualified to make Simple IRA contributions next year. They have already told me that they aren’t going to be making any contributions. I did some reading on the IRS website and it states they can’t opt out but they don’t have to contribute either. If they don’t contribute there’s nothing for me to match.(we do salary deductions and I match up to 3%). In this scenario do I just have them sign an IRS form 5304 and skip opening an account for them??
tullera
Posts: 8
Joined: Mon Nov 16, 2015 10:45 pm

Re: Simple IRA and non contributing employee

Post by tullera »

We have a SIMPLE IRA through Fidelity (9 employees) and there is no fee to open an employee account and then no ongoing annual fee even with a $0 balance, so we always open one for an employee once they become eligible so if/when they decide to contribute, that part is already done and it's easy. And then I have them fill one of these out and keep it on file:

https://www.fidelity.com/bin-public/060 ... reduct.pdf

I'm sure your plan has something similar. So I would say unless there is a fee, to go ahead and do it. Also having the employees do this has gotten everyone to eventually contribute because I have a chance to go over it with them explaining the paperwork and then they see the benefit of "free" money.

Also they have a 60-day window to change their mind:

https://www.irs.gov/retirement-plans/pl ... an#operate

so I'd say be ready just in case they do.
Topic Author
drramey
Posts: 37
Joined: Sun May 16, 2021 12:00 am

Re: Simple IRA and non contributing employee

Post by drramey »

Thanks for the reply. That helps out. I’ll have them to pick a brokerage and we will open an account for them.
Lee_WSP
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Re: Simple IRA and non contributing employee

Post by Lee_WSP »

You are required to give all eligible employees notice of the plan by (I believe) October 31st in the prior year.

You are required to make the employer match or non-elective contribution per the SIMPLE agreement by the due date of your taxes for the business.

If they do not open their own account to receive the funds, I am pretty sure you are allowed to open one for them. See the text of the 5304 agreement to double check, but if you can’t open an account for them, I do not see how you can make the non-elective contribution if you so chose that option in the agreement.

https://www.irs.gov/retirement-plans/re ... tributions
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