When Is a SIMPLE IRA an ERISA Plan?

A SIMPLE IRA offers small businesses a streamlined way to provide retirement savings opportunities for their employees. This plan combines employer and employee contributions, allowing for tax-deferred growth. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law establishing standards for most private-sector retirement and health plans. Understanding their interaction is important for employers, as ERISA imposes significant compliance obligations.

Understanding ERISA

ERISA is a federal law protecting the interests of participants and beneficiaries in employee benefit plans. It sets minimum standards for voluntarily established retirement and health plans in private industry. The law ensures plan funds are handled responsibly and promised benefits are delivered.

ERISA imposes specific responsibilities on those who manage plan assets, known as fiduciaries. These responsibilities include acting solely in the interest of plan participants and beneficiaries, managing the plan prudently, and diversifying investments to minimize risk. Fiduciaries must also adhere to plan documents consistent with ERISA. Failure to meet these duties can result in personal liability.

The SIMPLE IRA ERISA Exemption

SIMPLE IRAs are generally exempt from most ERISA requirements, making them attractive to small businesses. This exemption significantly reduces the administrative burdens and reporting obligations typically associated with ERISA-covered plans. The design of SIMPLE IRAs focuses on simplicity, allowing employers with 100 or fewer employees to establish a retirement plan without the complexities of a traditional 401(k).

To maintain this exemption, specific conditions must be met regarding employer involvement. The employer’s responsibility is to make required contributions: either a dollar-for-dollar match up to 3% of compensation or a non-elective contribution of 2% of compensation for each eligible employee. Employees must choose their own financial institution for their SIMPLE IRA, either from a list or directly. The employer cannot restrict an employee’s ability to transfer funds. The plan must be individual IRAs for each employee, not a single trust controlled by the employer.

When a SIMPLE IRA May Fall Under ERISA

Despite their general exemption, certain employer actions can inadvertently cause a SIMPLE IRA to become subject to ERISA’s full requirements. This occurs when an employer assumes responsibilities or exercises control beyond what is permitted for the exemption. For instance, if an employer actively manages investments within individual SIMPLE IRAs, it could be seen as exercising discretionary authority over plan assets.

An employer imposing restrictions on how employees can move or invest funds, rather than simply facilitating access, might trigger ERISA applicability. If the employer acts as a “fiduciary” by selecting or monitoring specific investment options beyond merely providing a choice, the plan may lose its exemption. Using a single trust or pooled account controlled by the employer, instead of individual IRA accounts, is another common pitfall. These actions could transform a straightforward SIMPLE IRA into a complex, ERISA-governed plan, subjecting the employer to significant compliance obligations and potential liabilities.