Simple IRA

[Unregistered]

I recently left my employer where I had a Simple IRA plan. I maxed out my contribution for 2005 before I left. For this year he has agreed to a 3% match(dollar for dollar) up to my compensation for this calendar year. He normally doesn't put his required contribution to the Simple IRA plan until he files his taxes (usually in March). Since I resigned from his organization in July of this year, is he not still responsible for his matching contribution for the Simple IRA. I know that he will try to make up some rule that will get him out of his portion of the match. I would like to show him or his lawyer where he is responsible for completing his contribution to the Simple IRA (if I am correct about him still being responsible). Thanks.
Gary

[Bees Knees]

Simple IRA

There is no specific code or regulation that deals directly with the issue of how to handle matching contributions when an employee quits before the end of the year.

However, there is a line of reasoning that seems to make the issue obvious. IRC Section 408(p)(2)(A)(iii) simply states that under the 3% match rule, “the employer is required to make a matching contribution to the simple retirement account for any year in an amount equal to so much of the amount the employee elects”…as long as it “does not exceed the applicable percentage (3%) of compensation for the year.”

It does not say the match is required, unless the employee quits before the employer gets around to making this matching contribution. It simply states the employer is required to match the employee’s contribution IF the employee elects to contribute.

There is also no annual limit on the amount of compensation used to determine the matching contribution. It is a dollar for dollar match for what the employee elected to defer, up to 3% of the employee’s compensation. Nor does it say at what time during the year the employee’s compensation is used to determine this 3% limit. The compensation used to determine the 3% limit applies to compensation earned at any time during the year.

This rule for SIMPLE plans seems to be in contrast to 401(k) plans where employers are not required to match employee elective deferrals. Some employers do have in their plan documents that they will match dollar for dollar employee contributions up to a certain percentage of compensation. But those are provisions the employer elects to put into the plan. Typically the employer’s match in a 401(k) is subject to the vesting rules, so the employee might not be entitled to it for leaving the job early.

But under IRC Section 408(p)(3), the employee must be fully vested at all times in both the employee and employer’s contributions to a SIMPLE plan. So the employer does not have the right to place restrictions on the employee’s rights, either to the employee’s elective contributions or to the employer’s matching contributions.

[JON]

1% Or 2%

I am not going to edit mine-Bee's as usual states it best, but the employee gets the same % as the employer contributes for all. That may be 1%, 2% or 3%..

[jainen]

Good luck

I researched this for the employer and found that he is required to make the match for all employees eligible during the year. My client refused anyway. Good luck making your point. I doubt that your best strategy would be going head-on with the attorney, but at least the law is on your side.

[Bees Knees]

I don't believe the employer would want to suffer the penalty

The problem with employers that seem to think they can make up the rules they wish to follow, it is a serious thing to break these requirements. A qualified employer plan must follow the rules, otherwise it is not a qualified plan.

Typically, employers who use these simplified type of qualified plans, such as a SEP or a SIMPLE, are doing so because they want their own retirement plans padded. A small business owner is probably not going to offer a SIMPLE or a SEP if he or she is not interested in participating.

That being said, the response you make when the employer decides to ignore the rules is to say, if the IRS audits your plan and decides you weren't following the qualified plan rules, then your plan is not a qualified plan and all plan assets are immediately taxable to all participants, including the employer's plan assets.

Does an employer really want all of his or her own personal retirement plan assets to become immediately taxable? No. Well then, follow the rules. End of story.

[jainen]

end of the story

I don't think that would be the end of the story. If the plan fails, then all the employees would also have taxes and penalties. It would take a great deal of loyalty not to go after a boss who did this to you. Good jobs are hard to find, but not that hard.

[Lance Emerson]

You don't have to just lay down because you're afraid to deal with your employer's lawyer.

Go to the Employee Benefits Security Administration.

http://www.dol.gov/ebsa/welcome.html

I doubt the employer and the lawyer will be so scary if the EBSA is breathing down their necks.

Look at the Summary Plan Description (SPD). It should have an explanation of how benefits are accrued and paid into the plan. I'd also write a letter to the employer asking when the benefits will be paid into the account. Perhaps with a reference to the fact that you're being nice by trying to work this out now before the contribution date so any problems can be worked out before the plan is at risk of termination of tax-deferred status.

[JON]

Not

I don't think that would be the end of the story. If the plan fails, then all the employees would also have taxes and penalties. It would take a great deal of loyalty not to go after a boss who did this to you. Good jobs are hard to find, but not that hard.

I have never seen or heard of an retirement audit where employee's ended up worse. I have seen and heard of the employer redistributing money from owner employee's own retirement fund, lots of penalties, even one case where plan was suspended and employees were given rights to rollover to IRA or take as taxable without penalty and the employer having to pay into employee plans + penalties. Seldom will IRS punish the slave for the owner's mistakes.