The SIMPLE IRA Exclusive Plan Rule

May 8, 2015

Learn the rules of SIMPLE IRAs, including one of the most important rules - the exclusive plan rule.

SIMPLE IRAs were created by Congress to give small employers an opportunity to sponsor a retirement plan and not subject them to all of the cumbersome 401(k) requirements. But, what one hand giveth, the other taketh away.

Although SIMPLE IRAs are not subject to 401(k) rules, they do have rules of their own. One of the most important of these rules is the exclusive plan rule.

The rule states that, during any calendar year, an employer that sponsors a SIMPLE IRA plan may not sponsor another retirement plan in which employees earn benefits. Employees cannot receive an allocation in a defined contribution plan or an increase of benefit in a defined benefit plan.

There are two exceptions that may apply to the rule, simply, they are in the case of certain:

  1. Union employees excluded from the SIMPLE IRA plan
  2. Employer mergers or acquisitions

As a practical matter, for employers looking to establish a new SIMPLE IRA plan that do not have an existing retirement plan in place, extra planning is not needed to comply with the exclusive plan rule.

However, for an employer looking to terminate an existing plan and establish a new SIMPLE IRA plan, some advanced planning is necessary. The employer will want to be sure sufficient notice is given to terminate the existing plan and there are no benefit accruals or contributions (by either the employer or employee) for the calendar year in which the employer wants to sponsor the new SIMPLE IRA.

Relative to most other retirement plans, SIMPLE IRA plans are less complex. The exclusive plan rule is just one of the SIMPLE IRA requirements of which you will want to be aware. To learn about other SIMPLE IRA requirements, take a look at the material below, or contact the Pacific Life Retirement Strategies Group at (800) 722-2333, ext. 3939.

Pacific Life and its affiliates do not provide any employer-sponsored qualified plan administrative services or impartial investment advice and do not act in a fiduciary capacity for any plan. Please contact your plan administrator for any questions relating to your plan.


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