Employee Benefits-IRS Discusses The Exclusive Plan Requirement As It Applies To The Establishment Of SIMPLE IRA Plans

In Employee Plans News, Issue 2013-1, February 13, 2013, the IRS faced the following question: Our company has a calendar-year profit-sharing plan that we are terminating. The contribution for 2012 to the profit-sharing plan will be allocated as of December 31, 2012, but won’t be deposited until 2013. We set up a SIMPLE IRA plan effective January 1, 2013. Do we meet the exclusive-plan requirement for SIMPLE IRA plans? The IRS responded as follows:

Yes, your company may have a SIMPLE IRA plan for 2013 if you:

• met the other SIMPLE IRA plan requirements (for example, giving notice to your employees before their 60-day election period); and
• don’t allocate any profit-sharing contribution to your employees for 2013. (Your profit-sharing contribution that will be allocated as of December 31, 2012, is a contribution for 2012, although it will be deposited in 2013.)

Exclusive-plan requirement. Generally, an employer can’t make SIMPLE IRA plan contributions for a calendar year if the employer (or its predecessor) has a qualified plan (other than the SIMPLE IRA plan) under which any employee:

• receives an allocation of contributions in a defined contribution plan, or
• has an increase in a benefit accrued in a defined benefit plan,
for a plan year of the qualified plan that begins or ends in that calendar year.

Internal Revenue Code Section 408(p)(2)(D) contains both the exclusive-plan requirement and also exceptions for other plans in which:

• The only participants in the other plans are employees covered by a collective bargaining agreement (IRC Section 408(p)(2)(D))

• The other plans result from the employer’s involvement in an acquisition, disposition or similar transaction (IRC Section 408(p)(10))

Examples.

Calendar-year plan made contributions for later year

If you make a contribution in 2013 to the profit-sharing plan that is based on employees’ compensation for any part of 2013, then:

• your employees will receive an allocation of profit-sharing contributions for 2013, and
• you can’t have a SIMPLE IRA plan for 2013.

Non-calendar-year plans

For non-calendar-year profit-sharing plans, you have to consider 2 years in determining whether employees receive an allocation of contributions. You can’t have a SIMPLE IRA plan for either the 2012 or 2013 calendar year if:

• your profit-sharing plan year runs from July 1, 2012 – June 30, 2013, and
• any employee receives an allocation of contributions for the plan year ending June 30, 2013.