Question

Identify the characteristics of SIMPLE IRAs.

Identify the characteristics of SIMPLE 401(k)plans.

List and define the different types of SAMPLE plans.

What are the rules for establishing a SAMPLE plans?

When does ERISA apply to a 403(b)plan?

Who is eligible to establish a 403(b)plan?

What investment options are available for 403(b) plans?

How are distributions from 403(b) plans taxed?

What are the rollover, distribution, and minimum distribution rules applicable to 403(b) plans?

Answer 1

1)  Characteristics of SIMPLE IRAs :-

• A SIMPLE IRA is a type of tax - deferred retirement savings plan that most small businesses with 100 or fewer employees can use.
• A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
• "SIMPLE" stands for "Savings Incentive Match Plan for Employees," and "IRA" stands for "Individual Retirement Account."
• Employers can choose to make a 2% retirement account contribution to all employees or an optional matching contribution of up to 3%.
• Employees can contribute a maximum of $13,500 annually in 2020; the maximum is increased periodically to account for inflation. Retirement savers ages 50 and older may make an additional catch-up contribution of $3,000, bringing their annual maximum to $16,500.
• One of the major provisions regarding this plan is that the government will provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
• The appeal of SIMPLE IRAs is that they have minimal paperwork requirements, just an initial plan document and annual disclosures to employees.
• The employer establishes the plan through a financial institution that administers it. Startup and maintenance costs are low, and employers get a tax deduction for contributions they make for employees.
• To be eligible to establish a SIMPLE IRA, the employer must have 100 or fewer employees.
  To participate in the plan, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year.
• Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude those employees from participation who receive benefits through a union.

• Employees Control the Investments - With most 401(k)s, the employee is limited to the investment options that the employer provides for. This is considerably different when compared to the SIMPLE IRA. Being a self employed retirement plan, the SIMPLE IRA gives the employee discretion of what exactly he wants his money to be invested into. If he wants to buy individual stocks, mutual funds, ETFs, or CDs, he is allowed.

• Participants not only choose the financial institution, but they are also free to engage in do-it-yourself investing. That means they can choose how the money is invested, where it’s invested, as well as the level of risk that they are willing to assume.

• SIMPLE IRAs don’t require filing special reports with the IRS.

• A lot of 401(k)s have loan provisions that allow the employee to borrow against their money if need be. With SIMPLE IRAs, this is not the case.

• Once the plan is established, employers are required to contribute to it each year unless the plan is terminated. However, employers may change their contribution decision between the 2% mandatory contribution and the 3% matching contribution if they follow IRS rules.

• Most retirement plans have the 10% early withdrawal penalty if under the age of 59.5. But with the SIMPLE IRA, it takes it one step further.
  If the SIMPLE IRA that you’ve started is less than two years and you cash it out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax.

2)  Characteristics of SIMPLE 401(k) plans :-

• SIMPLE 401(k) plans combine the features of traditional 401(k)s with the simplicity of SIMPLE IRAs.
  A subset of the 401(k) plan is the SIMPLE 401(k) plan.
• the SIMPLE 401(k) is a simplified, stripped-down version of a regular 401(k) plan, geared for the self-employed and small business owners. As with the SIMPLE IRA, only employers with a staff of 100 or fewer can establish a SIMPLE 401(k) plan. The business can be structured in any form, including sole proprietors, partnerships, and corporations.
• Employees who are at least 21 years old and have completed at least one year of service must be allowed to participate in the SIMPLE 401(k) plan. They also must have received at least $5,000 in compensation for the preceding year.

• Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer must make either:
  1) A matching contribution up to 3% of each employee’s pay, or
  2) A non-elective contribution of 2% of each eligible employee’s pay.

• If an employer establishes a SIMPLE 401(k) plan, then the employer :
  1) Must have 100 or fewer employers.
  2) Cannot have any other retirement plans.
  3) Need to annually file a Form 5500.

• Fully vested – Employees are completely vested in all contributions, including both their own and those from their employer. This is good news for employees who qualify for distributions, as it allows them to take out money whenever they need it.

• Loans available – Like a regular 401(k) plan, the employee can take out a loan against his SIMPLE 401(k) plan. This isn’t available with a SIMPLE IRA plan.

• Employees contribute to it with pre-tax dollars out of their paychecks, investing the funds in options provided by the plan administrator. The IRS sets the amount they can contribute each year. It's generally about two-thirds of the contribution allowed for a regular 401(k). Employees who are 50 or older can make an additional catch-up contribution—about half of that allowed for a regular 401(k).
  In 2020 the contribution limit is  $13,500 , while the catch-up contribution limit is at $3,000.

3)  SIMPLE plan :-

SIMPLE IRA Plans for Small Businesses is a joint project of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a type of tax-deferred retirement account that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to a SIMPLE account.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan.

SIMPLE IRAs are simpler and have lower start-up and administrative costs than many other retirement plans. The employer does not have filing requirements with a SIMPLE IRA.

According to Internal Revenue Service regulations, only employers with fewer than 100 employees—and which do not offer other retirement plans—may establish a SIMPLE IRA. All employees who received $5,000 or more in compensation from an employer during any two previous calendar years and who are expected to receive $5,000 or more in compensation this year are eligible to participate in the employer’s SIMPLE IRA plan.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) has lower contribution limits than most other employer-sponsored retirement plans. For 2020, the contribution limit is $13,500 for employees under age 50, while those aged 50 or older were able to make a catch-up contribution of an extra $3,000.

A SIMPLE IRA can only be rolled over to a traditional IRA after a two-year waiting period, beginning from the day that the employee first participated in the plan.

The employer may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting a SIMPLE IRA plan.

4) The rules for establishing a SIMPLE plans :-

1) Who can establish a SIMPLE IRA plan?

Any employer (including self-employed individuals, tax-exempt organizations and governmental entities) that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. For purposes of the 100-employee limitation, one must take into account all employees employed at any time during the calendar year, including those employees who have not met the plan's eligibility requirements.

2) The employer can set up a SIMPLE IRA plan effective on any date between January 1 and October 1, provided he didn’t previously maintain a SIMPLE IRA plan. If he is a new employer that came into existence after October 1 of the year, he can establish the SIMPLE IRA plan as soon as administratively feasible after the business came into existence. If he had previously established a SIMPLE IRA plan, you must set up a new one effective on January 1. The effective date cannot be before he actually establishes the plan.

3) The SIMPLE IRA plan is to be maintained on a calendar-year basis.

4) A SIMPLE IRA must be set up for an employee before the first date by which the employer deposits a contribution into the employee's SIMPLE IRA.

5) Generally, the employer can’t contribute to a SIMPLE IRA plan for a calendar year if he maintains another retirement plan and any of his employees receives an allocation or accrues a benefit under the other plan during that calendar year.

However, the employer can have a SIMPLE IRA plan even though he maintains another retirement plan if:

• The other plan is only for employees covered under a collective bargaining agreement, and the SIMPLE IRA plan excludes these employees; or
• The business was part of an acquisition, disposition or similar transaction during the current calendar year or the 2 prior calendar years, and only the employer's separate employees participate in the SIMPLE IRA plan.

6) Employers establish the plan using Internal Revenue Service (IRS) Form 5304-SIMPLE if they want to allow employees to choose the financial institution where they will hold their SIMPLE IRAs, or using Form 5305-SIMPLE if the employer wants to choose the financial institution where employees will hold their IRAs.

7) Employees must fill out a SIMPLE IRA adoption agreement to open their accounts.

8) Once the plan is established, employers are required to contribute to it each year unless the plan is terminated. However, employers may change their contribution decision between the 2% mandatory contribution and the 3% matching contribution if they follow IRS rules.

5) When does ERISA apply to a 403(b)plan?

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law containing detailed rules that plan sponsors and other fiduciaries must comply with when setting up and operating retirement and other employee benefit plans. ERISA requires plan sponsors to file government reports, provide information to participants, protect plan assets and deliver benefits to participants.

403(b) plans are commonly used by tax-exempt organizations to provide retirement benefits for their employees. Generally, plans that are established or maintained by private tax-exempt organizations are subject to ERISA (governmental and non-electing church plans are always exempt).

Most 403(b) plans, like other employee benefit plans, are subject to ERISA if they are sponsored by private tax-exempt employers.

The firm can generally assume its 403(b) plan is subject to ERISA unless it qualifies for one of the exemptions listed below :-

• Governmental plans (e.g., plans sponsored by a state, county, or municipality or one of their agencies, schools, or instrumentalities).
• Church plans, unless the plan sponsor has voluntarily elected to have the plan covered by ERISA.

• In 1979, the Deptt. of Labour issued the four requirements under the safe harbor all of which are to be met in order to claim an exemption from ERISA.
  Participation must be voluntary.
  All rights under the annuity contracts or custodial accounts must be enforceable by the employee or beneficiary (not the employer.)
  Involvement of the employer must be limited to certain restricted activities.
  The employer must receive no direct or indirect compensation for maintaining the plan other than a reasonable reimbursement of expenses incurred to operate the plan.

6) A 403(b) plan is a retirement plan established for the benefit of employees of public schools and certain tax-exempt organizations. These plans accept payroll-deducted contributions for participant-directed investing and are intended to help the employees meet long-term objectives, such as generating retirement income.

The following employees are eligible to participate in a 403(b) plan:

• Employees of tax-exempt organizations established under IRC Section 501(c)(3).

• Employees of public school systems who are involved in the day-to-day operations of a school.

• Employees of cooperative hospital service organizations.

• Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).

• Employees of public school systems organized by Indian tribal governments.

• Certain ministers if they are:

  Ministers employed by Section 501(c)(3) organizations.Self-employed ministers.
  A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.

The "universal availability rule" which is applicable to 403 (b) plan means that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees of the organization.

The employer may exclude certain employees from the plan:

• Employees who will contribute $200 or less annually.

• Those employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan of the employer.

• Employees who normally work less than 20 hours per week.

7) Investment options available for 403(b) plans

The 403(b) retirement plan, which is defined and regulated under the Internal Revenue Service tax code, is a tax-sheltered annuity plan. The IRS regulates contributions, distributions and the type of investments allowed for 403(b) retirement plans.

The 403(b) plans are intended for employees of non-profit employers. While 403(b) account holders have many of the advantages common to other tax-advantaged retirement plans, such as loans and in-service withdrawals, the 403(b) offers fewer investment options.

The investment options for 403(b) accounts are limited to mutual funds and fixed or variable annuities. According to the IRS, custodial accounts are invested in mutual funds and retirement income accounts may be invested in mutual funds or annuities.
Annuities are contracts between the account holder and an insurance company.

Additionally, 403(b) accounts that invest solely in mutual funds do not provide incidental life insurance to account holders. Employees whose 403(b) accounts are annuity contracts may pay for incidental life insurance, the cost of which is taxable in the contribution year.

8) How are distributions from 403(b) plans taxed?

A 403(b) plan is a tax-sheltered retirement plan for people who work for nonprofit companies, including charities, schools, and qualified religious organizations.

Contributions to a traditional 403(b) plan are deductible on your federal income taxes. The money comes out of your gross salary and goes directly into the 403(b) plan, untaxed.

If an employee opts for a traditional 403(b) plan, he doesn't pay taxes on the money he pays in until he starts making withdrawals after retirement.

Additionally, you won't owe taxes on the investment growth in your account until after you retire either. The money will grow tax-free until you begin making withdrawals.

Distributions from 403(b) plans are not taxed at capital gains rates, but are instead taxed at ordinary income rates.

The funds that are contributed to a 403(b) are not taxed before entering the retirement fund. Taxes are paid on these funds during the withdrawal process. In order to become eligible for a penalty-free withdrawal from their 403(b), individuals must have reached the age of 59 1/2.

9)

• You don't have to make withdrawals from a 403(b) when you retire, but at age 72 you must start to take annual required minimum distributions.
• If you retire before age 55, you may have to pay a penalty on top of income taxes on your withdrawals; if you retire at 55 or older, you will have to pay taxes on any lump sum withdrawals in the year in which you withdraw the funds.
• Upon retirement, you can annuitize all or part of your 403(b), which will provide you with a guaranteed income stream for life and can provide a designated beneficiary with funds after your death.
• You can also roll over all or part of your 403(b) into a 401(k) (if you change jobs), or a traditional or Roth IRA, among other accounts, in order to benefit from more varied investment options or better money management during retirement.  
• The IRS requires that you start taking withdrawals from your qualified retirement accounts (IRA accounts, 401(k)s, 457 plans and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE) once you reach age 70 1/2. This requirement is called a required minimum distribution, or RMD