Employee Benefits-IRS Reminds Us That SIMPLE IRA Plans Cannot Be Terminated Once The Year Has Started

In the Summer, 2009/Volume 9 edition of Employee Plans News, the IRS discussed the case of a small business which was maintaining a SIMPLE IRA plan for its employees. Before the beginning of this calendar year, the business owner notified eligible employees that they would each receive a 2% nonelective contribution for the year. Now, the business owner asks whether she can change her mind and not make the 2% nonelective contribution for this year, or otherwise terminate the SIMPLE IRA plan before the end of this year.

The IRS answered that the business owner may not decide during the year to stop making the contributions promised in the pre-year notification. A SIMPLE IRA plan is maintained on a whole-calendar year basis, and must continue for the entire calendar year, funding all contributions so promised. However, the business owner has until the filing deadline of her business’s tax return (for the year to which the contributions relate), including extensions, to deposit the nonelective contributions in the employees’ SIMPLE IRAs.

The IRS added that an employer can terminate its SIMPLE IRA plan prospectively, beginning with the next calendar year, after it has notified its employees that there will be no SIMPLE IRA plan for the upcoming year. This notification must be provided within a reasonable period of time prior to the start of that year.