As the June 30, 2022 CalSavers deadline bears down on employers with five or more California employees, many small employers may be giving thought to adopting a simplified retirement plan, whether a SEP or SIMPLE IRA. Establishment of one of these types of plans is a permissible alternative to participating in CalSavers. There are circumstances where these types of plans are a good fit. However, each of these types of plans imposes participation notification duties that employers often overlook, and noncompliance can put the tax-sanctioned status of the whole arrangement at risk. Below we summarize the relevant rules.
Simplified Employee Pension (SEP) Notification Duties
IRS Form 5305 is often used to establish a SEP. A plan set up via Form 5305 is considered adopted when eligible employees have been provided with:
- a copy of the completed, signed, and dated Form 5305-SEP, including the Instructions to Employer and Information to Employee sections;
- a statement to the effect that IRAs other than the IRA(s) into which employer contributions will be made may yield different rates of return and may have different terms concerning, among other things, transfers and withdrawals of funds from the IRA;
- a statement that notice of any amendment to the SEP, a copy of the amendment and a written explanation of its effects, will be provided within 30 days of the effective date of any such amendment; and
- a statement that the employer will provide written notice of contributions made to the plan, by the later of (a) January 31 of the year following the year in which the contribution is made, or (b) the date that is 30 days after the date the contribution is made. This notice duty may be met by reporting the SEP contribution on eligible employees’ Form W-2 for a given year. Failure to provide the notice of contribution may subject the employer to a $50 penalty per failure unless the failure is due to reasonable cause.
This information must be provided thereafter to each new employee who becomes eligible under the SEP.
Additional disclosure duties apply if you are using a prototype SEP arrangement, rather than Form 5305-SEP, including special disclosures for plans under which contributions are integrated with Social Security. Providing eligible employees with a copy of the SEP agreement will meet many of the disclosure requirements, but employers should check with the prototype SEP sponsor to confirm that they will timely supply your business with all necessary additional disclosures. Annual contribution reporting through Form W-2 is the same.
Savings Incentive Match Plan for Employees (SIMPLE IRAs)
Notification duties under a SIMPLE plan are more complicated than under a SEP due to the employee elective deferral feature. Also, there are two model SIMPLE forms in use, Form 5304-SIMPLE and Form 5305-SIMPLE. Form 5304-SIMPLE is used when all IRAs are established with a single designated financial institution, and Form 5305-SIMPLE is used when participants select their own IRA provider.
For an existing SIMPLE IRA plan, eligible employees must receive a Summary Description and Notification to Eligible Employees before the start of a 60-day election period. Since all SIMPLE plans must be on a calendar plan year, including those set up using Forms 5304- or 5305-SIMPLE, the plan year must be the calendar year. Therefore the 60-day election period runs from November 2 through December 31, and the notice must be provided before November 2 each year. Provision of a current copy of the completed Form 5304-SIMPLE or 5305-SIMPLE, with instructions, will satisfy both disclosure duties if Article VI – Procedures for Withdrawals, is completed. When Form 5304-SIMPLE is in use, the custodian or trustee may provide the Article VI information directly to the employees; employers should confirm that the custodian/trustee is timely meeting this disclosure duty, however.
For a new SIMPLE IRA plan or for a new hire who becomes eligible, the Model Salary Reduction Agreement that comprises part of Forms 5304- and 5305-SIMPLE must be provided prior to the 60-day period that includes either the date the employee becomes eligible or the day before. The employee must be able to commence elective deferrals as soon as they become eligible, regardless of whether the 60-day period has ended, but no earlier than the plan’s effective date. Certain special notification and election period rules apply when an employee becomes an eligible employee other than at the beginning of a calendar year, including when an employee is rehired during a plan year.
How to Deal with SEP and SIMPLE Mishaps
If you have not timely met your SEP notification duties as outlined above, you should consult an ERISA attorney.
If you have not timely met your SIMPLE-IRA plan notification duties as outlined above, you can fix the problem by following the steps outlined in the SIMPLE IRA Plan Fix-It Guide. Self-correction may be an option if you had practices and procedures in place to timely provide the notice but failed to follow them, and other pre-requisites to self-correction have been met. Otherwise, you may need to use the Voluntary Correction Program to fix the problem. This will generally require the involvement of an ERISA attorney.
In addition to notification duties, SIMPLE plans are subject to rules regarding timing of deposit of employees’ elective deferrals. Elective deferrals must be deposited with the IRA custodian or trustee within the 30-day period following the last day of the month in which the amounts otherwise would have been payable in cash to employees.
If elective deferrals are not timely deposited, the Department of Labor (DOL) may have to be contacted to correct the problem. Why is this necessary? To avoid potential employer liability for civil penalties, and in some cases involving missed or late elective deferrals, criminal penalties.
Special rules, not addressed above, may apply to plan documents not established using the IRS forms mentioned in this post.
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.
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