How to Suspend a Simple IRA Matching Program
A SIMPLE IRA is a retirement savings plan referred to by the IRS as a Savings Incentive Match Plan for Employees. In these programs, small employers can save administrative costs by setting up IRA plans for individual employees. Employees and employers can make contributions. While qualified retirement plans should be created with the goal of perpetuity, there are times when you may wish to suspend your SIMPLE IRA matching program, such as when you are establishing another plan or need to prevent over-contributions.
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Instructions
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Suspending Indefinitely
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1
Contact the IRS to review the requirements for suspending your SIMPLE IRA program. According to IRS regulations, you may not suspend contributions any earlier than the next calendar year. For example, if you decide in 2010 to suspend your plan, the soonest you could stop contributions is Jan. 1, 2011. Note that actual notification does not need to be sent to the IRS.
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Contact the financial institution administering your SIMPLE IRA. Obtain any forms that may be required to suspend contributions.
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3
Notify employees that the plan will be suspended. There is no IRS requirement for this notice, but try to give employees at least 60 days' notice out of respect and consideration. This is enough time for employees to find alternative savings programs.
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4
Notify payroll services about the suspension. Make sure payroll personnel are aware of the date that the SIMPLE IRA contributions and matches will stop.
Suspending to Prevent Over-Contributions
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5
Confirm contribution limits with the IRS or a tax adviser. As of 2010, employees are allowed to contribute a maximum of $11,500 per year unless they are older than 50. Those 50 or older are allowed a catch-up contribution of an additional $2,500. Employers are allowed to match up to 3 percent or give a 2 percent non-elective contribution.
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Determine whether you will exceed IRS limits with one or more employees. This should be done with the help of your SIMPLE IRA plan administrator. Employees sometimes exceed contributions because of pay rate changes, hour changes or simple calculation errors.
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7
Contact payroll services to suspend all contributions to any SIMPLE IRA that will exceed contribution limits.
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Notify the employees (if they haven't already been part of the process) of the change and explain that this is to prevent over-contribution penalties that they would be responsible for if the contributions were not suspended.
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9
Restart the contributions in the next calendar year, with appropriate adjustments to prevent over-contribution.
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Tips & Warnings
Over-contributions may be taxed 6 percent for each year they remain in the SIMPLE IRA.
