Timing Rules for SEPs and SIMPLE-IRAs Part II

Your Guide to State, Local, Federal, Estate + International Taxation

For the most part, SEPs (Simplified Employee Pensions) and SIMPLE (Savings Incentive Match Plan for Employees)-IRAs live up to their billing as easy ways to set aside tax-favored retirement funds for employees and employers. However, contribution rules for these plans are not necessarily straight-forward. To read part I of this post dealing with SEPs, click here.

SIMPLE-IRAs: A SIMPLE-IRA retirement plan can be adopted by an employer that meets both of the following requirements: a) it has 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year; and b) it doesn’t have another employer-sponsored retirement plan (except for a collectively bargained plan covering employees ineligible to participate in the SIMPLE plan) to which contributions were made or benefits accrued for the year.

Employees designate contributions to be made to a SIMPLE plan under a “qualified salary reduction arrangement.” This is a written arrangement under which an employee may elect to have the employer make elective employer contributions (expressed as a percentage of compensation, or, if the employer permits, a specific dollar amount) to a SIMPLE-IRA on behalf of the employee, or to the employee directly in cash. The amount that an employee may elect for any year can’t exceed $12,000 for 2013 or 2014. SIMPLE-IRA participants who are age 50 or over by the end of the plan year may make additional catch-up contributions of up to $2,500 for 2013 or 2014.

The employer must make either:

  1. A matching contribution equal to the amount the employee contributes, up to 3% of the employee’s compensation for the year; or, electively, as little as 1% in no more than two out of the previous five years, if the employer timely notifies the employees of the lower percentage; or
  2. A nonelective contribution of 2% of compensation for each employee eligible to participate who has at least $5,000 of compensation from the employer for the year.

The employer’s contributions for himself or herself must be the same type and rate as the contribution made for common-law employees.

Timing of contributions:

Salary reduction contributions for regular employees must be deposited no later than the close of the 30-day period following the last day of the month in which amounts otherwise would have been payable to the employee in cash. Salary reduction contributions to these plans must be made to the SIMPLE-IRA as of the earliest date on which the contributions can reasonably be segregated from the employer’s general assets, but in no event later than the 30-day deadline described above. Alternatively, salary reduction contributions may be made within seven business days after the employee would have otherwise received the money, to meet the DOL’s 7-day safe harbor for plans with fewer than 100 participants.

Salary reduction contributions for business owners, however, may be made within 30 days after the end of the tax year. For most people, this means salary reduction contributions for a year must be made by January 30 of the following year.

Employer contributions, whether matching contributions or nonelective contributions, whether for the owner or his or her employees, must be deposited by the due date (including extensions) of the federal income tax return for the tax year that includes the last day of the calendar year for which the employer made the contributions.

Jeremy Smith, CPA