know it, October 1 will be upon us and employers who want to establish
a Savings Incentive Match Plans for Employees (SIMPLE)
IRA for 2008 for employees of small employers (SIMPLE) IRA for
2008 will have missed the deadline for doing so, unless all required
paperwork and notification are completed by then. For those who plan
to establish a SIMPLE IRA for 2008, the following guidelines can be
owner may establish a SIMPLE IRA for his business only if he
had no more than 100 employees who earned $5,000 or more in
compensation during the preceding calendar year. For this purpose, all
employees, including those who are not eligible to participate in the
plan must be counted.
employees who received at least $5,000 from the employer during any two
preceding years, and are reasonably expected to receive at least $5,000
in compensation during the current year must be allowed to participate
in the SIMPLE IRA.
covered under a collective bargaining agreement and certain
non-resident aliens may be excluded from the plan
may make salary deferral contributions of up to $10,500 for 2008,
providing the amount deferred does not exceed 100% of their
compensation. Employees who are at least age 50 by the end of the year
may defer an additional $2,500.
must make either a matching contribution of 3% of compensation to all
employees who make salary deferral contributions; or make a 2%
non-elective contribution to all eligible employees whether or not they
make salary deferral contributions. The 3% matching contribution can be
reduced to at least 1% for two of every five years.
employer must notify each employee of the employee’s opportunity to
enter into a salary reduction agreement or to modify a prior agreement.
This notification must be provided immediately before the employee’s
60-day election period.
SIMPLE IRAs, the 60-day period includes the date the employee becomes
eligible. For example, if an employer establishes a SIMPLE IRA Plan
effective as of August 1, 2008, each eligible employee becomes eligible
to make salary reduction contributions on August 1 and the 60-day
period must begin no later than August 1. As such, employees may make
or change salary deferral elections for the year beginning August 1 and
ending 60-days later.
the SIMPLE Plan Document
establishing the SIMPLE IRA, the employer may choose to use either of
5304-SIMPLE, Savings Incentive Match Plan for Employees of Small
Employers (SIMPLE)—Not for Use With a Designated Financial Institution,
5305-SIMPLE, Savings Incentive Match Plan for Employees of Small
Employers (SIMPLE)—for Use With a Designated Financial Institution.
cases, the choice of form will be determined by the financial
institution with which the employer chooses to establish the SIMPLE IRA
Plan. For instance, Financial Institution ABC may only use the Form
5305-SIMPLE for establishing new SIMPLE IRA Plans, and if the employer
wants to establish the SIMPLE IRA Plan with that financial institution;
he would then need to use the Form 5305-SIMPLE.
the difference between the forms?
5304-SIMPLE: If the
employer uses Form 5304-SIMPLE, employees can choose the financial
institution with which they want to establish their SIMPLE IRAs and the
employer would be required to send their contributions to the
employees’ SIMPLE IRAs at those financial institutions.
employees are required to establish their SIMPLE IRAs with the
financial institution where the employer establishes the SIMPLE IRA
Plan, and all SIMPLE IRA contributions for the plan would be made to
accounts held with that financial institution. Employees that want to
maintain their SIMPLE IRA at another financial institution may do so.
However the employee will need to transfer or rollover their
contributions from the SIMPLE at the employer’s financial institution
to the SIMPLE at their own financial institution. The employer is
required to provide notification to employees regarding fees that may
(or may not) apply to such transfers.
the Simplified Employee Pension (SEP) IRA, the SIMPLE IRA is considered
to be the easiest plan to maintain for a business, as there are no
administrative or top heavy testing and no 5500 filing requirements.
However, employers should be aware of the notification requirements and
ensure that they are satisfied so as to avoid associated penalties.
information on SIMPLE IRA Plans is available in IRS publication 560,
available at www.irs.gov
of the rules that govern IRAs are usually provided in Ed Slott's IRA
Advisor Newsletter. If you are not already a subscriber and
want to get an idea of what the newsletter includes, you can preview past issues before
of the Month
Question: I left my
former employer this year and still have a balance of over
$250,000 in my account under the 401(k) plan that they established for
their employees. I am thinking of rolling over the amount to my
traditional IRA. However, I am in my early 50’s and would be subject to
the 10% early distribution penalty if I take distributions from my
traditional IRA. If I don’t find another job soon, I will need to make
withdrawals from the balance. Should I leave the amount in the 401(k)
plan so that I can make penalty free withdrawals at age 55 (or later)?
depends. The age 55 exception applies only if you left your employer in
the year that you reach age 55, or at a later age. If you left your
employer at age 52, your withdrawals will not be exempted from the 10%
early distribution penalty (under the age 55 rules) even if you leave
the assets in the plan until you reach age 55. However, since you no
longer work for the employer, you would be eligible for the exemption
under the substantially equal periodic payment (SEPP) rule for your
401(k) assets. Under the SEPP rule, you would be required to take
distributions for five years or until you reach age 59 ½, whichever is
longer, and the amount you are required to withdraw each year is
determined by using one of three IRS pre-approved formulas. Extreme
caution must be exercised when considering this option. You don’t want
to be locked into a distribution for five years (or even longer) if you
need funds for only a short term period.
other factors that should be considered, such as whether it makes sense
to leave your assets with your former employer, or whether it is better
to rollover the amount to your IRA. Talk to a financial advisor who is
an expert in the field of plan distributions and rollovers, such as an Elite
Issued Revenue Procedure 2008-29, which includes the 2009 inflation
adjusted amounts for Health Savings Accounts (HSAs). The new amounts
are as follows:
limitation on deductions for an individual with self-only coverage
under a high deductible health plan is $3,000.
limitation on deductions for an individual with family coverage under a
high deductible health plan is $5,950.
deductible health plan
deductible health plan” annual deductible limit is $1,150 for self-only
coverage or $2,300 for family coverage and the annual out-of-pocket
expenses (deductibles, co-payments, and other amounts, but not
premiums) is $5,800 for self-only coverage or $11,600 for family
Qualified Reservist Distributions Made
The Heroes Earnings Assistance and Relief Tax
Act of 2008 (HEART ACT) was signed into law on June 18. The HEART Act
provides incentives for members of the military and includes provisions
such as making the qualified reservist distributions permanent. You
may recall that the qualified reservist distribution was previously
defined as one taken by an active reservist, and meets the following
The reservist was ordered or called to active
duty after September 11, 2001, and before December 31, 2007.
The reservist was ordered or called to
active duty for a period of more than 179 days or for an indefinite
period because he is a member of a reserve component
The distribution is from an IRA or from
amounts attributable to elective deferrals under a section 401(k) or
403(b) plan or a similar arrangement.
The distribution was made no earlier than the
date of the order or call to active duty and no later than the close of
the active duty period.
2008 issue of Ed Slott's IRA Advisor is now available online. The areas
covered include the following:
Name the Trust as Beneficiary
Can be Revocable or Irrevocable
How an IRA
Trust Qualifies for the Stretch
vs. Discretionary Trust
the Trust After Death
the Oldest Beneficiary
Inherited IRAs from Creditors’ Claims
Goldberg, CPA, MBA, JD
Partner, Goldberg & Goldberg, P.C.
Be sure to
review the July issue and post your questions on our message board at http://www.irahelp.com/phpBB/index.php?area=,
where some of the best experts in the retirement field gather to
discuss technical issues.
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of the IRA Advisor, click the link below to access our "Subscribers
Only" section of our website:
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