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When it comes to saving for retirement, small business owners and their employees have various options at their disposal, one of which is the Savings Incentive Match Plan for Employees, or SIMPLE IRA. Among the documents crucial to this process is the IRS 5304-SIMPLE form, aimed at setting up this particular type of retirement plan. This form enables both employers and employees to contribute to the retirement savings, providing a straightforward, tax-favored way to set aside money for the golden years. It's designed specifically for businesses that do not have any other retirement plan and is ideal for those who are looking for an easy and cost-effective solution. The document itself, while not overly complicated, requires careful attention to ensure that the plan is implemented correctly and in compliance with IRS regulations. Understanding its key elements, such as contribution limits, matching requirements, and eligibility criteria, is essential for anyone considering this retirement saving avenue. This overview serves as a stepping stone for small business owners and their employees to grasp the basics of the 5304-SIMPLE form and how it can be utilized to foster a secure, financially stable future.

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Form 5304-SIMPLE

(Rev. March 2012)

Department of the Treasury

Internal Revenue Service

Savings Incentive Match Plan

for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution

OMB No. 1545-1502

Do not file

with the Internal Revenue Service

establishes the following SIMPLE

Name of Employer

IRA plan under section 408(p) of the Internal Revenue Code and pursuant to the instructions contained in this form.

Article I—Employee Eligibility Requirements (complete applicable box(es) and blanks—see instructions)

1General Eligibility Requirements. The Employer agrees to permit salary reduction contributions to be made in each calendar year to the SIMPLE IRA established by each employee who meets the following requirements (select either 1a or 1b):

a

Full Eligibility. All employees are eligible.

 

 

b

Limited Eligibility. Eligibility is limited to employees who are described in both (i) and (ii) below:

 

 

 

(i)

Current compensation. Employees who are reasonably expected to receive at least $

 

in compensation

 

(ii)

(not to exceed $5,000) for the calendar year.

 

 

 

 

Prior compensation. Employees who have received at least $

 

 

in compensation (not to exceed $5,000)

 

 

during any

 

calendar year(s) (insert 0, 1, or 2) preceding the calendar year.

 

 

2Excludable Employees.

The Employer elects to exclude employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining. Note: This box is deemed checked if the Employer maintains a qualified plan covering only such employees.

Article II—Salary Reduction Agreements (complete the box and blank, if applicable—see instructions)

1Salary Reduction Election. An eligible employee may make an election to have his or her compensation for each pay period reduced. The total amount of the reduction in the employee’s compensation for a calendar year cannot exceed the applicable amount for that year.

2Timing of Salary Reduction Elections

aFor a calendar year, an eligible employee may make or modify a salary reduction election during the 60-day period immediately preceding January 1 of that year. However, for the year in which the employee becomes eligible to make salary reduction contributions, the period during which the employee may make or modify the election is a 60-day period that includes either the date the employee becomes eligible or the day before.

b In addition to the election periods in 2a, eligible employees may make salary reduction elections or modify prior elections,

. If the Employer chooses this option, insert a period or periods (for example, semi-annually, quarterly, monthly, or daily) that will apply uniformly to all eligible employees.

cNo salary reduction election may apply to compensation that an employee received, or had a right to immediately receive, before execution of the salary reduction election.

dAn employee may terminate a salary reduction election at any time during the calendar year. If this box is checked, an employee who terminates a salary reduction election not in accordance with 2b may not resume salary reduction contributions during the calendar year.

Article III—Contributions (complete the blank, if applicable—see instructions)

1Salary Reduction Contributions. The amount by which the employee agrees to reduce his or her compensation will be contributed by the Employer to the employee’s SIMPLE IRA.

2 a Matching Contributions

(i)For each calendar year, the Employer will contribute a matching contribution to each eligible employee’s SIMPLE IRA equal to the employee’s salary reduction contributions up to a limit of 3% of the employee’s compensation for the calendar year.

(ii)The Employer may reduce the 3% limit for the calendar year in (i) only if:

(1) The limit is not reduced below 1%; (2) The limit is not reduced for more than 2 calendar years during the 5-year period ending with the calendar year the reduction is effective; and (3) Each employee is notified of the reduced limit within a reasonable period of time before the employees’ 60-day election period for the calendar year (described in Article II, item 2a).

bNonelective Contributions

(i)For any calendar year, instead of making matching contributions, the Employer may make nonelective contributions equal to 2% of

compensation for the calendar year to the SIMPLE IRA of each eligible employee who has at least $, (not more

than $5,000) in compensation for the calendar year. No more than $250,000* in compensation can be taken into account in determining the nonelective contribution for each eligible employee.

(ii)For any calendar year, the Employer may make 2% nonelective contributions instead of matching contributions only if:

(1)Each eligible employee is notified that a 2% nonelective contribution will be made instead of a matching contribution; and

(2)This notification is provided within a reasonable period of time before the employees’ 60-day election period for the calendar year (described in Article II, item 2a).

3Time and Manner of Contributions

aThe Employer will make the salary reduction contributions (described in 1 above) for each eligible employee to the SIMPLE IRA established at the financial institution selected by that employee no later than 30 days after the end of the month in which the money is withheld from the employee’s pay. See instructions.

bThe Employer will make the matching or nonelective contributions (described in 2a and 2b above) for each eligible employee to the SIMPLE IRA established at the financial institution selected by that employee no later than the due date for filing the Employer’s tax return, including extensions, for the taxable year that includes the last day of the calendar year for which the contributions are made.

* This is the amount for 2012. For later years, the limit may be increased for cost-of-living adjustments. The IRS announces the increase, if any, in a news release, in the Internal Revenue Bulletin, and on the IRS’s internet website at IRS.gov.

For Paperwork Reduction Act Notice, see the instructions.

Cat. No. 23377W

Form 5304-SIMPLE (Rev. 3-2012)

Form 5304-SIMPLE (Rev. 3-2012)

Page 2

Article IV—Other Requirements and Provisions

 

1Contributions in General. The Employer will make no contributions to the SIMPLE IRAs other than salary reduction contributions (described in Article III, item 1) and matching or nonelective contributions (described in Article III, items 2a and 2b).

2Vesting Requirements. All contributions made under this SIMPLE IRA plan are fully vested and nonforfeitable.

3No Withdrawal Restrictions. The Employer may not require the employee to retain any portion of the contributions in his or her SIMPLE IRA or otherwise impose any withdrawal restrictions.

4Selection of IRA Trustee. The Employer must permit each eligible employee to select the financial institution that will serve as the trustee, custodian, or issuer of the SIMPLE IRA to which the Employer will make all contributions on behalf of that employee.

5Amendments To This SIMPLE IRA Plan. This SIMPLE IRA plan may not be amended except to modify the entries inserted in the blanks or boxes provided in Articles I, II, III, VI, and VII.

6Effects Of Withdrawals and Rollovers

aAn amount withdrawn from the SIMPLE IRA is generally includible in gross income. However, a SIMPLE IRA balance may be rolled over or transferred on a tax-free basis to another IRA designed solely to hold funds under a SIMPLE IRA plan. In addition, an individual may roll over or transfer his or her SIMPLE IRA balance to any IRA or eligible retirement plan after a 2-year period has expired since the individual first participated in any SIMPLE IRA plan of the Employer. Any rollover or transfer must comply with the requirements under section 408.

bIf an individual withdraws an amount from a SIMPLE IRA during the 2-year period beginning when the individual first participated in any SIMPLE IRA plan of the Employer and the amount is subject to the additional tax on early distributions under section 72(t), this additional tax is increased from 10% to 25%.

Article V—Definitions

1Compensation

aGeneral Definition of Compensation. Compensation means the sum of the wages, tips, and other compensation from the Employer subject to federal income tax withholding (as described in section 6051(a)(3)), the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority, and the employee’s salary reduction contributions made under this plan, and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the Employer on Form W-2 (as described in section 6051(a)(8)).

bCompensation for Self-Employed Individuals. For self-employed individuals, compensation means the net earnings from self-employment determined under section 1402(a), without regard to section 1402(c)(6), prior to subtracting any contributions made pursuant to this plan on behalf of the individual.

2Employee. Employee means a common-law employee of the Employer. The term employee also includes a self-employed individual and a leased employee described in section 414(n) but does not include a nonresident alien who received no earned income from the Employer that constitutes income from sources within the United States.

3Eligible Employee. An eligible employee means an employee who satisfies the conditions in Article I, item 1 and is not excluded under Article I, item 2.

4SIMPLE IRA. A SIMPLE IRA is an individual retirement account described in section 408(a), or an individual retirement annuity described in section 408(b), to which the only contributions that can be made are contributions under a SIMPLE IRA plan and rollovers or transfers from another SIMPLE IRA.

Article VI—Procedures for Withdrawals (The Employer will provide each employee with the procedures for withdrawals of contributions received by the financial institution selected by that employee, and that financial institution’s name and address (by attaching that information or inserting it in the space below) unless: (1) that financial institution’s procedures

are unavailable, or (2) that financial institution provides the procedures directly to the employee. See Employee Notification in the instructions.)

Article VII—Effective Date

This SIMPLE IRA plan is effective

 

 

 

 

. See

instructions.

 

 

 

 

 

 

*

*

*

*

*

 

 

 

 

 

 

 

 

Name of Employer

 

By:

Signature

Date

 

 

 

 

 

 

Address of Employer

 

Name and title

 

 

Form 5304-SIMPLE (Rev. 3-2012)

Form 5304-SIMPLE (Rev. 3-2012)

Page 3

Model Notification to Eligible Employees

I.Opportunity to Participate in the SIMPLE IRA Plan

You are eligible to make salary reduction contributions to theSIMPLE IRA

plan. This notice and the attached summary description provide you with information that you should consider before you decide whether to start, continue, or change your salary reduction agreement.

II.Employer Contribution Election

For the

 

calendar year, the Employer elects to contribute to your SIMPLE IRA (employer must select either (1), (2), or (3)):

(1)

A matching contribution equal to your salary reduction contributions up to a limit of 3% of your compensation for the year;

(2)

A matching contribution equal to your salary reduction contributions up to a limit of

% (employer must insert a

number from 1 to 3 and is subject to certain restrictions) of your compensation for the

year; or

 

(3)

A nonelective contribution equal to 2% of your compensation for the year (limited to compensation of $250,000*) if you are an

employee who makes at least $

 

(employer must insert an amount that is $5,000 or less) in compensation for

the year.

 

 

 

 

 

 

 

 

 

 

III.Administrative Procedures

To start or change your salary reduction contributions, you must complete the salary reduction agreement and return it to

 

 

 

(employer should designate a place or

individual by

 

(employer should insert a date that is not less than 60

days after notice is given).

 

 

 

 

IV. Employee Selection of Financial Institution

You must select the financial institution that will serve as the trustee, custodian, or issuer of your SIMPLE IRA and notify your Employer of your selection.

Model Salary Reduction Agreement

I.Salary Reduction Election

Subject to the requirements of the SIMPLE IRA plan of

 

 

 

 

(name of

employer) I authorize

 

% or $

 

 

(which equals

 

% of my current rate of pay) to be withheld from

my pay for each pay period and contributed to my SIMPLE IRA as a salary reduction contribution.

II.Maximum Salary Reduction

I understand that the total amount of my salary reduction contributions in any calendar year cannot exceed the applicable amount for that year. See instructions.

III.Date Salary Reduction Begins

I understand that my salary reduction contributions will start as soon as permitted under the SIMPLE IRA plan and as soon as

administratively feasible or, if later,. (Fill in the date you want the salary reduction contributions to begin. The date must be after you sign this agreement.)

IV. Employee Selection of Financial Institution

I select the following financial institution to serve as the trustee, custodian, or issuer of my SIMPLE IRA.

Name of financial institution

Address of financial institution

SIMPLE IRA account name and number

I understand that I must establish a SIMPLE IRA to receive any contributions made on my behalf under this SIMPLE IRA plan. If the information regarding my SIMPLE IRA is incomplete when I first submit my salary reduction agreement, I realize that it must be completed by the date contributions must be made under the SIMPLE IRA plan. If I fail to update my agreement to provide this information by that date, I understand that my Employer may select a financial institution for my SIMPLE IRA.

V.Duration of Election

This salary reduction agreement replaces any earlier agreement and will remain in effect as long as I remain an eligible employee under the SIMPLE IRA plan or until I provide my Employer with a request to end my salary reduction contributions or provide a new salary reduction agreement as permitted under this SIMPLE IRA plan.

Signature of employee

 

Date

*This is the amount for 2012. For later years, the limit may be increased for cost-of-living adjustments. The IRS announces the increase, if any, in a news release, in the Internal Revenue Bulletin, and on the IRS website at IRS.gov.

Form 5304-SIMPLE (Rev. 3-2012)

Form 5304-SIMPLE (Rev. 3-2012)

Page 4

General Instructions

Section references are to the Internal Revenue Code unless otherwise noted.

Purpose of Form

Form 5304-SIMPLE is a model Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plan document that an employer may use to establish a SIMPLE IRA plan described in section 408(p), under which each eligible employee is permitted to select the financial institution for his or her

SIMPLE IRA.

These instructions are designed to assist in the establishment and administration of the SIMPLE IRA plan. They are not intended to supersede any provision in the SIMPLE IRA plan.

Do not file Form 5304-SIMPLE with the IRS. Instead, keep it with your records.

For more information, see Pub. 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), and Pub. 590, Individual Retirement Arrangements (IRAs).

Note. If you used the March 2002, August 2005, or September 2008 version of Form 5304-SIMPLE to establish a model Savings Incentive Match Plan, you are not required to use this version of the form.

Which Employers May

Establish and Maintain a

SIMPLE IRA Plan?

To establish and maintain a SIMPLE IRA plan, you must meet both of the following requirements:

1.Last calendar year, you had no more than 100 employees (including self-employed individuals) who earned $5,000 or more in compensation from you during the year. If you have a SIMPLE IRA plan but later exceed this 100-employee limit, you will be treated as meeting the limit for the 2 years following the calendar year in which you last satisfied the limit.

2.You do not maintain during any part of the calendar year another qualified plan with respect to which contributions are made, or benefits are accrued, for service in the calendar year. For this purpose, a qualified plan (defined in section 219(g)(5)) includes a qualified pension plan, a profit-sharing plan, a stock bonus plan, a qualified annuity plan, a tax-sheltered annuity plan, and a simplified employee pension (SEP) plan. A qualified plan that only covers employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining is disregarded if these employees are excluded from

participating in the SIMPLE IRA plan. If the failure to continue to satisfy the

100-employee limit or the one-plan rule described in 1 and 2 above is due to an acquisition or similar transaction involving your business, special rules apply. Consult your tax advisor to find out if you can still maintain the plan after the transaction.

Certain related employers (trades or businesses under common control) must be treated as a single employer for purposes of the SIMPLE IRA requirements. These are: (1) a controlled group of corporations under section 414(b); (2) a partnership or sole proprietorship under common control under section 414(c); or (3) an affiliated service group under section 414(m). In addition, if you have leased employees required to be treated as your own employees under the rules of section 414(n), then you must count all such leased employees for the requirements listed above.

What Is a SIMPLE IRA Plan?

A SIMPLE IRA plan is a written arrangement that provides you and your employees with an easy way to make contributions to provide retirement income for your employees. Under a SIMPLE IRA plan, employees may choose whether to make salary reduction contributions to the SIMPLE IRA plan rather than receiving these amounts as part of their regular compensation. In addition, you will contribute matching or nonelective contributions on behalf of eligible employees (see Employee Eligibility Requirements below and Contributions later). All contributions under this plan will be deposited into a SIMPLE individual retirement account or annuity established for each eligible employee with the financial institution selected by him or her.

When To Use Form 5304-SIMPLE

A SIMPLE IRA plan may be established by using this Model Form or any other document that satisfies the statutory requirements.

Do not use Form 5304-SIMPLE if:

1.You want to require that all SIMPLE IRA plan contributions initially go to a financial institution designated by you. That is, you do not want to permit each of your eligible employees to choose a financial institution that will initially receive contributions. Instead, use Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution;

2.You want employees who are nonresident aliens receiving no earned income from you that is income from sources within the United States to be eligible under this plan; or

3.You want to establish a SIMPLE 401(k) plan.

Completing Form 5304-SIMPLE

Pages 1 and 2 of Form 5304-SIMPLE contain the operative provisions of your SIMPLE IRA plan. This SIMPLE IRA plan is considered adopted when you have completed all applicable boxes and blanks and it has been executed by you.

The SIMPLE IRA plan is a legal document with important tax consequences for you and your employees. You may want to consult with your attorney or tax advisor before adopting this plan.

Employee Eligibility Requirements (Article I)

Each year for which this SIMPLE IRA plan is effective, you must permit salary reduction contributions to be made by all of your employees who are reasonably expected to receive at least $5,000 in compensation from you during the year, and who received at least $5,000 in compensation from you in any 2 preceding years. However, you can expand the group of employees who are eligible to participate in the SIMPLE IRA plan by completing the options provided in Article I, items 1a and 1b. To choose full eligibility, check the box in Article I, item 1a. Alternatively, to choose limited eligibility, check the box in Article I, item 1b, and then insert “$5,000” or a lower compensation amount (including zero) and “2” or a lower number of years of service in the blanks in (i) and (ii) of Article I, item 1b.

In addition, you can exclude from participation those employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining. You may do this by checking the box in Article I, item 2. Under certain circumstances, these employees must be excluded. See Which Employers May Establish and Maintain a SIMPLE IRA Plan? above.

Salary Reduction Agreements (Article II)

As indicated in Article II, item 1, a salary reduction agreement permits an eligible employee to make a salary reduction election to have his or her compensation for each pay period reduced by a percentage (expressed as a percentage or dollar amount). The total amount of

Form 5304-SIMPLE (Rev. 3-2012)

Page 5

the reduction in the employee’s compensation cannot exceed the applicable amount for any calendar year. The applicable amount is $11,500 for 2012. After 2012, the $11,500 amount may be increased for cost-of-living adjustments. In the case of an eligible employee who is 50 or older by the end of the calendar year, the above limitation is increased by $2,500 for 2012. After 2012, the $2,500 amount may be increased for cost-of-living adjustments.

Timing of Salary Reduction Elections

For any calendar year, an eligible employee may make or modify a salary reduction election during the 60-day period immediately preceding January 1 of that year. However, for the year in which the employee becomes eligible to make salary reduction contributions, the period during which the employee may make or modify the election is a 60-day period that includes either the date the employee becomes eligible or the day before.

You can extend the 60-day election periods to provide additional opportunities for eligible employees to make or modify salary reduction elections using the blank in Article II, item 2b. For example, you can provide that eligible employees may make new salary reduction elections or modify prior elections for any calendar quarter during the 30 days before that quarter.

You may use the Model Salary Reduction Agreement on page 3 to enable eligible employees to make or modify salary reduction elections.

Employees must be permitted to terminate their salary reduction elections at any time. They may resume salary reduction contributions for the year if permitted under Article II, item 2b. However, by checking the box in Article II, item 2d, you may prohibit an employee who terminates a salary reduction election outside the normal election cycle from resuming salary reduction contributions during the remainder of the calendar year.

Contributions (Article III)

Only contributions described below may be made to this SIMPLE IRA plan. No additional contributions may be made.

Salary Reduction Contributions

As indicated in Article III, item 1, salary reduction contributions consist of the amount by which the employee agrees to reduce his or her compensation. You must contribute the salary reduction contributions to the financial institution selected by each eligible employee.

Matching Contributions

In general, you must contribute a matching contribution to each eligible employee’s SIMPLE IRA equal to the employee’s salary reduction contributions. This matching contribution cannot exceed 3% of the employee’s compensation. See Definition of Compensation, below.

You may reduce this 3% limit to a lower percentage, but not lower than 1%. You cannot lower the 3% limit for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective.

Note. If any year in the 5-year period described above is a year before you first established any SIMPLE IRA plan, you will be treated as making a 3% matching contribution for that year for purposes of determining when you may reduce the employer matching contribution.

To elect this option, you must notify the employees of the reduced limit within a reasonable period of time before the applicable 60-day election periods for the year. See Timing of Salary Reduction Elections above.

Nonelective Contributions

Instead of making a matching contribution, you may, for any year, make a nonelective contribution equal to 2% of compensation for each eligible employee who has at least $5,000 in compensation for the year.

Nonelective contributions may not be based on more than $250,000* of compensation.

To elect to make nonelective contributions, you must notify employees within a reasonable period of time before the applicable 60-day election periods for such year. See Timing of Salary Reduction Elections above.

Note. Insert “$5,000” in Article III, item 2b(i) to impose the $5,000 compensation requirement. You may expand the group of employees who are eligible for nonelective contributions by inserting a compensation amount lower than $5,000.

Effective Date (Article VII)

Insert in Article VII the date you want the provisions of the SIMPLE IRA plan to become effective. You must insert January 1 of the applicable year unless this is the first year for which you are adopting any SIMPLE IRA plan. If this is the first year for which you are adopting a SIMPLE IRA plan, you may insert any date between January 1 and October 1, inclusive of the applicable year.

Additional Information

Timing of Salary Reduction Contributions

The employer must make the salary reduction contributions to the financial institution selected by each eligible employee for his or her SIMPLE IRA no later than the 30th day of the month following the month in which the amounts would otherwise have been payable to the employee in cash.

The Department of Labor has indicated that most SIMPLE IRA plans are also subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Under Department of Labor regulations at 29 CFR 2510.3-102, salary reduction contributions must be made to each participant’s SIMPLE IRA as of the earliest date on which those contributions can reasonably be segregated from the employer’s general assets, but in no event later than the 30-day deadline described previously.

Definition of Compensation

“Compensation” means the amount described in section 6051(a)(3) (wages, tips, and other compensation from the employer subject to federal income tax withholding under section 3401(a)), and amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Usually, this is the amount shown in box 1 of Form W-2, Wage and Tax Statement. For further information, see Pub. 15, (Circular E), Employer’s Tax Guide. Compensation also includes the salary reduction contributions made under this plan, and, if applicable, compensation deferred under a section 457 plan. In determining an employee’s compensation for prior years, the employee’s elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract are also included in the employee’s compensation.

For self-employed individuals, compensation means the net earnings from self-employment determined under section 1402(a), without regard to section 1402(c)(6), prior to subtracting any contributions made pursuant to this SIMPLE IRA plan on behalf of the individual.

Employee Notification

You must notify each eligible employee prior to the employee’s 60-day election period described above that he or she can make or change salary reduction elections and select the financial institution that will serve as the trustee, custodian, or

*This is the amount for 2012. For later years, the limit may be increased for cost-of-living adjustments. The IRS announces the increase, if any, in a news release, in the Internal Revenue Bulletin, and on the IRS’s website at IRS.gov.

Form 5304-SIMPLE (Rev. 3-2012)

Page 6

issuer of the employee’s SIMPLE IRA. In this notification, you must indicate whether you will provide:

1.A matching contribution equal to your employees’ salary reduction contributions up to a limit of 3% of their compensation;

2.A matching contribution equal to your employees’ salary reduction contributions subject to a percentage limit that is between 1 and 3% of their compensation; or

3.A nonelective contribution equal to 2% of your employees’ compensation.

You can use the Model Notification to Eligible Employees earlier to satisfy these employee notification requirements for this SIMPLE IRA plan. A Summary Description must also be provided to eligible employees at this time. This summary description requirement may be satisfied by providing a completed copy of pages 1 and 2 of Form 5304-SIMPLE (including the information described in

Article VI—Procedures for Withdrawals).

If you fail to provide the employee notification (including the summary description) described above, you will be liable for a penalty of $50 per day until the notification is provided. If you can show that the failure was due to reasonable cause, the penalty will not be imposed.

If the financial institution’s name, address, or withdrawal procedures are not available at the time the employee must be given the summary description, you must provide the summary description without this information. In that case, you will have reasonable cause for not including this information in the summary description, but only if you ensure that it is provided to the employee as soon as administratively feasible.

Reporting Requirements

You are not required to file any annual information returns for your SIMPLE IRA plan, such as Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. However, you must report to the IRS which eligible employees are active participants in the SIMPLE IRA plan and the amount of your employees’ salary reduction contributions to the SIMPLE IRA plan on Form W-2. These contributions are subject to social security, Medicare, railroad retirement, and federal unemployment tax.

Deducting Contributions

Contributions to this SIMPLE IRA plan are deductible in your tax year containing the end of the calendar year for which the contributions are made.

Contributions will be treated as made for a particular tax year if they are made for that year and are made by the due date (including extensions) of your income tax return for that year.

Summary Description

Each year the SIMPLE IRA plan is in effect, the financial institution for the SIMPLE IRA of each eligible employee must provide the employer the information described in section 408(l)(2)(B). This requirement may be satisfied by providing the employer a current copy of Form 5304-SIMPLE (including instructions) together with the financial institution’s procedures for withdrawals from SIMPLE IRAs established at that financial institution, including the financial institution’s name and address. The summary description must be received by the employer in sufficient time to comply with the Employee Notification requirements earlier.

There is a penalty of $50 per day imposed on the financial institution for each failure to provide the summary description described above. However, if the failure was due to reasonable cause, the penalty will not be imposed.

Paperwork Reduction Act Notice. You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping . .

.

.

3 hr., 38 min.

Learning about the

 

 

 

law or the form . .

.

.

2 hr., 26 min.

Preparing the form

.

.

. . 47 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Internal Revenue Service, Tax Products Coordinating Committee, SE:W:CAR:MP:T:M:S, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Do not send this form to this address. Instead, keep it with your records.

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Document Attributes

Fact Number Description
1 The IRS 5304-SIMPLE form is used for setting up a Savings Incentive Match Plan for Employees (SIMPLE) that allows employees and employers to contribute to traditional IRAs set up for employees.
2 It is designed for small businesses with 100 or fewer employees who earn $5,000 or more during the year.
3 Unlike the 5305-SIMPLE, the 5304-SIMPLE allows employees to choose the financial institution for receiving their SIMPLE IRA contributions.
4 Employers must contribute either a matching contribution up to 3% of the employee's pay or a 2% non-elective contribution for each eligible employee.
5 Employers using the 5304-SIMPLE cannot maintain another qualified plan that is not a SIMPLE plan.
6 The form requires basic employer information, selection of contribution type, and the start date of the plan.
7 No IRS filing is necessary for the 5304-SIMPLE form, but it must be kept on file by the employer and available for employee review.
8 The plan allows for contributions to be made up until the tax filing deadline.
9 Governing laws for the SIMPLE IRA are primarily federal, under the Internal Revenue Code and specifically the guidelines provided by the IRS, as there are no state-specific governing laws for the 5304-SIMPLE form.

How to Fill Out IRS 5304-SIMPLE

After making the decision to adopt a savings incentive match plan for employees, commonly referred to as a SIMPLE IRA plan, employers are tasked with completing and submitting the appropriate paperwork to the IRS. The IRS 5304-SIMPLE form is one such document that plays a crucial role in this process. This form enables small businesses to establish a SIMPLE IRA plan that allows both employees and employers to contribute to traditional IRAs set up for employees. It is essential for ensuring compliance with IRS regulations and for creating a structured approach to retirement savings for employees. The steps outlined below will guide employers through the process of accurately filling out the IRS 5304-SIMPLE form, thereby helping to secure a financially stable future for their workforce.

  1. Begin by entering the calendar year at the top of the form to indicate the effective year for the SIMPLE IRA plan. This sets the timeframe for the contributions and benefits outlined in the document.
  2. Fill in the name of the employer or the company setting up the SIMPLE IRA plan in the space provided. This identifies the entity responsible for contributions to the plan.
  3. Include the employer's identification number (EIN) in the designated area. This unique number is essential for tax purposes and helps the IRS track the company's retirement plan contributions.
  4. Provide the employer's address, ensuring it is complete and accurate. This address will be used for any necessary correspondence regarding the plan.
  5. Specify the name and address of the financial institution where the SIMPLE IRA contributions will be deposited. This information is critical as it directs where the funds will be managed and invested.
  6. Determine the eligibility requirements for employees to participate in the SIMPLE IRA plan. Document these criteria in the section provided, detailing the prerequisites such as length of service or minimum compensation levels.
  7. Choose whether the employer will match employee contributions or offer a non-elective contribution. Clearly mark the selected option to define the employer's contribution strategy.
  8. Sign and date the form. This is a declaration by the employer that all the information provided is accurate and that they agree to abide by the rules governing SIMPLE IRA plans.

Once the IRS 5304-SIMPLE form is completed and reviewed for accuracy, it must be retained by the employer for their records. It is not submitted to the IRS but should be readily available upon request. This document serves as the foundation of the SIMPLE IRA plan, guiding both employer and employee contributions. With the form properly filled out, employers can proceed with the next steps in the setup process, such as informing eligible employees about the plan and working with the chosen financial institution to manage the contributions. This ensures the successful implementation of a retirement savings program that benefits everyone involved.

More About IRS 5304-SIMPLE

  1. What is an IRS 5304-SIMPLE form used for?

    The IRS 5304-SIMPLE form is designed for small businesses to establish a Savings Incentive Match Plan for Employees (SIMPLE) IRA accounts for their employees. It allows each employee to choose the financial institution for receiving their contributions, offering a degree of flexibility in managing their retirement savings.

  2. Who is eligible to use the 5304-SIMPLE form?

    Small businesses with 100 or fewer employees who earned $5,000 or more during the preceding calendar year are eligible to use this form. It's specifically tailored for employers that want to provide their employees with a choice in managing their SIMPLE IRA accounts.

  3. How does a 5304-SIMPLE plan differ from a 5305-SIMPLE plan?

    The key difference lies in the choice of the financial institution. With a 5304-SIMPLE plan, employees can choose which institution holds their SIMPLE IRA. On the other hand, a 5305-SIMPLE plan requires all contributions to be deposited into an IRA the employer selects.

  4. Can an employer change from a 5305-SIMPLE to a 5304-SIMPLE plan or vice versa?

    Yes, an employer can switch between the two types of SIMPLE IRA plans. However, this change should align with the plan year and IRS regulations, including providing timely notifications to employees.

  5. What are the contribution limits for a SIMPLE IRA under a 5304-SIMPLE plan?

    Contribution limits for a SIMPLE IRA plan are updated yearly to account for cost-of-living adjustments. Generally, employees can contribute a percentage of their salary, up to a maximum amount set by the IRS. Employers are also required to make matching contributions or non-elective contributions.

  6. Are there any filing requirements with the IRS for the 5304-SIMPLE plan?

    No, once the 5304-SIMPLE plan is established, there are no annual filing requirements with the IRS. However, employers must keep the signed forms on file and provide all necessary documents and disclosures to their employees.

  7. What happens if an employee chooses not to select a financial institution?

    If an employee does not select a financial institution for their SIMPLE IRA contributions, the employer can choose a default institution. It's crucial for employers to communicate this information and ensure employees understand their options and obligations under the plan.

  8. Can both part-time and full-time employees participate in a 5304-SIMPLE plan?

    Part-time employees are eligible to participate in a 5304-SIMPLE plan if they have earned at least $5,000 in compensation during any two years prior to the current calendar year and are reasonably expected to earn at least $5,000 in the current year.

  9. How does an employer start a 5304-SIMPLE plan?

    To start a 5304-SIMPLE plan, an employer must fill out and sign the IRS 5304-SIMPLE form before the beginning of any calendar year in which the plan will apply, but preferably by October 1 of the year before. They must also ensure that each eligible employee receives a copy of the signed form and is informed about which financial institutions they can use.

Common mistakes

Filling out IRS forms can often feel like navigating through a maze, and the IRS 5304-SIMPLE form is no exception. This form applies to the Savings Incentive Match Plan for Employees, facilitating small businesses in setting up savings plans. A range of common pitfalls can make the process even more complicated, potentially leading to delays or issues with the IRS. Below are six mistakes frequently made when filling out this form:

  1. Incorrect Employer Identification Number (EIN): An essential detail, the employer's EIN is sometimes entered incorrectly. This number is crucial for the IRS to identify the business properly.
  2. Leaving Fields Blank: Every required field must be filled out. Often, sections are skipped or left incomplete, which can cause processing delays or necessitate corrections.
  3. Incorrect Plan Year: The plan year should reflect the fiscal year for the business; however, errors occur when the calendar year is mistakenly used instead.
  4. Misunderstanding Eligibility Requirements: The form requires specifying eligibility criteria for employees. Misinterpreting these guidelines can lead to issues in plan administration.
  5. Not Specifying Matching Contribution Levels Properly: One of the key features of the SIMPLE plan is the employer’s matching contribution. Sometimes, the contribution levels are not clearly defined, which can result in administrative challenges.
  6. Forgetting Signatures and Dates: The form must be signed and dated to be valid. This requirement is frequently overlooked, resulting in the form being rejected or returned.

While these mistakes are common, they can be avoided with thorough review and understanding of the form’s requirements. Attention to detail and, if necessary, consultation with a financial advisor or tax professional can help ensure that the process is smooth and successful.

Documents used along the form

When setting up a SIMPLE IRA plan for employees, employers often need to fill out the IRS 5304-SIMPLE form. This form is crucial for establishing a Savings Incentive Match Plan for Employees without designating a specific financial institution for the individual employee's accounts. However, this form is just one piece of the puzzle. To fully implement the plan, several other forms and documents are usually required.

  • IRS Form 940: This form is used by employers to report annual Federal Unemployment Tax Act (FUTA) tax. While not directly related to the SIMPLE IRA plan, maintaining compliance with FUTA is important for employers to ensure they are in good standing, which is relevant when setting up any employee benefit plan.
  • IRS Form W-3: This form is a summary/transmittal form that accompanies the W-2 forms sent to the Social Security Administration. It summarizes employee earnings, Social Security earnings, Medicare earnings, and tax withholdings for the year. This information is crucial in determining contributions to employee SIMPLE IRA accounts, especially for calculating match amounts.
  • Employee Eligibility and Enrollment Forms: While not formal IRS documents, these internal forms are essential for administering a SIMPLE IRA plan. They determine which employees are eligible based on criteria set forth by the IRS and the employer, and they capture employee elections regarding contributions.
  • Summary Plan Description (SPD): This document provides employees with detailed information about their benefits and how the plan operates. It is a requirement under the Employee Retirement Income Security Act (ERISA) for employers offering any retirement plan, including SIMPLE IRA plans. The SPD must be provided to employees to ensure they understand their rights and obligations under the plan.

Together with the IRS 5304-SIMPLE form, these documents form a comprehensive suite required for the proper setup and maintenance of a SIMPLE IRA plan. By understanding the role each form and document plays, employers can better navigate the complexities of offering retirement benefits and ensure both compliance and clarity for themselves and their employees.

Similar forms

  • IRS Form 5305-SIMPLE: This document is quite similar to the IRS 5304-SIMPLE form, as both are used to establish Savings Incentive Match Plans for Employees (SIMPLE) IRAs. The major difference lies in the choice of financial institution; Form 5305-SIMPLE requires that all contributions be deposited at an institution designated by the employer, while Form 5304-SIMPLE allows participants to choose their financial institution.

  • IRS Form 401(k): These documents share similarities in that they are both used to establish retirement plans for employees. However, the 401(k) can be considered more complex and flexible, offering options for Roth contributions, loan provisions, and requires ADP and ACP nondiscrimination testing unless it's a safe harbor 401(k) plan.

  • IRS Form 403(b): This form is similar to the 5304-SIMPLE in that it is also used to set up retirement savings plans. Form 403(b) plans are specific to employees of public schools, certain tax-exempt organizations, and ministers, highlighting their distinct eligibility requirements compared to the broader applicability of the 5304-SIMPLE.

  • IRS Form SEP (Simplified Employee Pension): Both these documents facilitate retirement saving options for employees, with the key difference being the funding. SEP plans are entirely employer-funded, while the SIMPLE IRA plans under IRS 5304-SIMPLE involve both employer and employee contributions.

  • IRS Form 457: This form is similar to the IRS 5304-SIMPLE as it is utilized for retirement plans. Specifically, Form 457 is for governmental and certain non-governmental employers. It offers deferred compensation plans, differentiating it in terms of the types of employers and the deferral nature of contributions.

  • IRS Form W-4: While primarily a form for determining the amount of taxes to withhold from an employee's paycheck, the W-4 shares a common purpose with the 5304-SIMPLE in employee financial planning. The connection is indirect, as both forms include considerations for financial wellbeing and future planning through tax withholding adjustments and retirement savings, respectively.

  • IRS Form 5498: This document is related to the 5304-SIMPLE through its role in the reporting of IRA contributions. While Form 5498 is more of a reporting tool used by financial institutions to report contributions, rollovers, and the end-of-year value of the IRA accounts, it complements the 5304-SIMPLE by capturing the accumulation of contributions over time, providing a yearly snapshot of retirement savings growth.

Dos and Don'ts

Filling out the IRS 5304-SIMPLE form, a Savings Incentive Match Plan for Employees, requires careful attention to detail. This form allows employees to contribute part of their salaries to a SIMPLE IRA for retirement. Here is a guide on what to do and what not to do to ensure the process is smooth and error-free:

Do:
  • Read the instructions carefully before you begin. Understanding the IRS guidelines can help avoid common mistakes.
  • Verify eligibility for the plan. Ensure your business meets the criteria set by the IRS for establishing a SIMPLE IRA plan.
  • Use accurate and complete information for each section of the form. Inaccurate information can lead to delays or issues with the plan’s operation.
  • Consult with a professional if you are uncertain about any part of the form. A financial advisor or tax professional can offer valuable guidance.
  • Keep a copy of the form for your records. Having documentation is essential for future reference or in case of an audit.
  • Submit the form by the IRS deadline to avoid late penalties. Timeliness is crucial in all dealings with the IRS.
Don't:
  • Overlook the eligibility criteria. Failing to meet the IRS requirements can lead to penalties or the need to refile.
  • Leave sections incomplete. Every question is important for the IRS to understand and approve your SIMPLE IRA plan.
  • Guess or estimate figures. Provide precise information to ensure your plan complies with IRS regulations.
  • Use outdated forms. Always download or request the most recent version of the form from the IRS website.
  • Ignore IRS notices or corrections. If the IRS contacts you with questions or requests for additional information, respond promptly and accurately.
  • Forget to update the form if business or employee information changes. Keeping your SIMPLE IRA plan current is essential to its success and compliance.

Misconceptions

The 5304-SIMPLE form is related to the Savings Incentive Match Plan for Employees, but there are a few misconceptions about it:

  • Many people believe that the IRS 5304-SIMPLE form is incredibly complicated. Despite its official appearance and the financial terminology used, with proper guidance or advice, most can navigate it without significant difficulty.

  • Another common misconception is that only businesses with a large number of employees can use the 5304-SIMPLE plan. In truth, it's designed for small businesses with 100 or fewer employees, offering them an accessible way to provide retirement benefits.

  • Some think that setting up a 5304-SIMPLE plan is very expensive for the employer. However, compared to other retirement plans, the setup and administrative costs are relatively low. This affordability makes it an attractive option for many small businesses.

  • There's also a belief that the form must be filed with the IRS annually. Actually, the IRS 5304-SIMPLE form is primarily for the employer's records and the plan's setup. It does not need to be filed with the IRS every year.

  • Another incorrect idea is that employees have no control over their investment options within the plan. The reality is that the 5304-SIMPLE allows employees to choose the financial institution for their own contributions, giving them control over their investment choices.

  • Some employers think that they can change their contribution levels at any time. However, the contribution formulas are set when the plan is established and can only be changed for the following year.

  • It's also mistakenly believed that all employees must be allowed to participate. While most employees who have earned at least $5,000 in the preceding two years and are anticipated to earn at least $5,000 in the current year must be included, there are specific exclusions allowed under the plan rules.

  • Lastly, there's a misconception that loans are permitted under the 5304-SIMPLE IRA plan. Unlike some other retirement plans, loans to participants are not allowed under SIMPLE IRA plans, including those established with a 5304-SIMPLE form.

Key takeaways

The IRS 5304-SIMPLE form is an important document for small businesses wishing to offer a SIMPLE (Savings Incentive Match Plan for Employees) IRA plan to their employees. This form enables both the employer and employees to make contributions to individual retirement accounts. Understanding the critical aspects of filling out and using this form can streamline the setup process and ensure compliance with IRS guidelines. Below are five key takeaways about the IRS 5304-SIMPLE form:

  • Eligibility Requirements: To use the IRS 5304-SIMPLE form, a business must meet specific eligibility criteria. It should have 100 or fewer employees who earned $5,000 or more during the preceding calendar year. Additionally, the employer cannot maintain another qualified plan that covers employees for the same period as the SIMPLE IRA plan.
  • Form Selection: The 5304-SIMPLE form is particularly suited for businesses that prefer to allow their employees to choose the financial institution for holding their SIMPLE IRA accounts. If an employer wants to designate a specific financial institution for all SIMPLE IRAs, the IRS 5305-SIMPLE form would be the appropriate choice instead.
  • Contribution Limits: The form outlines the contribution limits for both employees and employers. Employees can make salary reduction contributions up to the annual limit set by the IRS ($13,500 for 2020, subject to adjustments for inflation). Employers are required to match employee contributions on a dollar-for-dollar basis up to 3% of an employee’s compensation, or they can choose to make a non-elective contribution of 2% of an employee’s compensation for each eligible employee.
  • Deadlines and Timing: It is crucial to adhere to the established deadlines when setting up a SIMPLE IRA plan using the 5304-SIMPLE form. The plan must be established and the form completed no later than October 1st of the year in which the plan will become effective. This deadline does not apply to newly established businesses, which are granted additional flexibility.
  • Recordkeeping and Reporting: Employers must maintain accurate records related to the SIMPLE IRA plan. This includes keeping track of employee contributions, employer contributions, and any distributions. While the IRS 5304-SIMPLE form itself does not need to be submitted to the IRS, it is crucial for both the employer and the employee to retain a completed copy for their records and for potential future IRS inquiries.
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