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The SIMPLE IRA Change under the Path Act made ‘Simple’…Maybe…

Susan D. Diehl

Under the PATH Act which President Obama signed into law on Dec. 18, 2015, a number of changes were made that affect retirement plans and their advisors/practitioners. One of the changes affects the money that can be rolled over into a SIMPLE IRA. Many financial institutions have been struggling with what to do internally to permit the ability to roll other plans over into SIMPLE IRA plans.

The following is a breakdown of how this change affects SIMPLE plans and what institutions need to know before accepting these rollover contributions and what you can do to accept these monies.

Before the PATH Act, no other plans could rollover into a SIMPLE plan, except for another SIMPLE-IRA. After the 2 year holding period a taxpayer could roll from the SIMPLE IRA into a traditional IRA; convert to a Roth IRA; or roll into an employer plan. Those rules remain.

The amendment to the SIMPLE IRA regulations permits incoming rollovers to be accepted into the SIMPLE IRA effective after the date of enactment (Dec. 18, 2015) from:

  • all 401(a) qualified plans (including 401(k) plans);
  • 403(b) plans;
  • governmental 457 plans;
  • a Federal Thrift Savings Plan (remember this is ‘treated’ as a 401(a) qualified plan); and
  • traditional IRAs.
These rollovers are permitted only after the two-year period has been met for the SIMPLE IRA. PenServ reached out to the IRS in late December with some of the questions on the implementation of these changes and the timing of document amendments. It is important to note that the IRS still has not released any guidance on updating SIMPLE-IRA prototype plans.

Your internal forms, IRS publications, plan documents and the IRS model SIMPLE forms will need to be changed, as well as your IRA documents regarding rollovers. Whether to amend your plans now or wait for the IRS to issue something is up to you and your financial institution.

What can you do now?

Employer Documents

Prototype: If you currently use the SIMPLE-IRA prototype, you cannot make any changes to the document. You will need to wait for the IRS to indicate when they will accept the new plans with this language for approval. (Also note that the IRS submission fee has gone from $200 to $1,000). You will not be able to accept rollovers from other plans under the prototype for the time being. Keep in mind that when this program opens up, approvals can take up to a year on IRA-type plans.

Model 5304-SIMPLE/5305-SIMPLE: If you use the IRS model, you are permitted to make changes to that document as long as you satisfy the instructions that the IRS provides and obviously do not make a change that will violate the SIMPLE-IRA rules. You should check with your document provider for an updated SIMPLE plan document.

Employee Custodial/Trust Agreements

The good news here is that there are only IRS model documents — Forms 5305-S and 5305-SA. In the instructions to these forms, the IRS spells out how you can amend these forms. Most providers and firms keep the IRS language and then tack on additional customized articles; in addition, one should always add a technical disclosure.

Your document provider has probably already updated the technical disclosure since changes made before the PATH Act would have required some changes for 2016 anyway. Contact your document provider for an updated form for the employees to sign.

And lastly, make sure that after you have done all of the above that any internal forms that deal with rollovers are updated to reflect the new rules.

Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.