Study guide
10.1 SIMPLE IRA Establishment: Form 5305-SIMPLE vs. Form 5304-SIMPLE
Certified IRA Services Professional CISP
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1 Introduction: The CISP Exam
About the CISP Exam: Blueprint, Logistics, and Study Plan
2 Chapter 1: IRA Documentation & Account Establishment
1.1 IRS Model Trust and Custodial Agreements (Forms 5305 and 5305-A) 1.2 Roth IRA Agreements and Prototype Documents (Forms 5305-R and 5305-RA) 1.3 Account Disclosures, 7-Day Revocation Rights, and Annual Financial Statements 1.4 Beneficiary Designations, Per Stirpes vs. Per Capita, and Disclaimers
3 Chapter 2: Traditional IRA Eligibility, Contributions & Deductibility
2.1 Traditional IRA Contribution Limits, Compensation Requirements, and Spousal IRAs 2.2 Active Participant Status and Deductibility MAGI Phaseout Ranges 2.3 Excess Contributions: 6% Excise Tax, Net Income Attributable (NIA), and Correction Methods
4 Chapter 3: Roth IRA Eligibility, Contributions & Conversions
3.1 Roth IRA Eligibility, MAGI Phaseouts, and Contribution Rules 3.2 Conversions from Traditional/SEP/SIMPLE IRAs and Backdoor Roth Strategies 3.3 Recharacterizations of Regular Contributions and Repealed Conversion Recharacterizations
5 Chapter 4: Retirement Plan Portability, Transfers & Rollovers
4.1 Direct Trustee-to-Trustee Transfers vs. 60-Day Indirect Rollovers 4.2 The One-Rollover-Per-12-Month Rule and Bobrow v. Commissioner 4.3 Qualified Employer Plan to IRA Rollovers and Mandatory 20% Withholding 4.4 Portability Between IRA Types and Inherited IRA Transfer Restrictions 4.5 Other Portability Transactions: Repayments, Recontributions, and Special Rollovers
6 Chapter 5: IRA Distributions, Premature Penalties & Withholding
5.1 Traditional IRA Distribution Taxation and Form 8606 Pro-Rata Basis Recovery 5.2 Roth IRA Nonqualified vs. Qualified Distributions and Ordering Rules 5.3 Premature Distributions, the 10% Penalty, and Section 72(t) Exceptions (Including SECURE 2.0) 5.4 Federal Income Tax Withholding (Form W-4R, Default 10%) and State Withholding
7 Chapter 6: Required Minimum Distributions (RMDs) for Account Owners
6.1 SECURE 2.0 RMD Age Milestones (73 and 75), Required Beginning Date (RBD), and Deadlines 6.2 Lifetime RMD Calculation: Uniform Lifetime Table vs. Joint Life and Last Survivor Table 6.3 Account Aggregation Rules and Qualified Charitable Distributions (QCDs)
8 Chapter 7: Beneficiary Distributions & Inherited IRAs
7.1 Eligible Designated Beneficiaries (EDBs) and Lifetime Stretch Distributions 7.2 Non-Eligible Designated Beneficiaries and the 10-Year Payout Rule 7.3 Post-RBD Death Rules and the 2024 Treasury Final Regulations (Annual RMDs in Years 1–9) 7.4 Non-Designated Beneficiaries (Estates, Charities, Non-Qualifying Trusts) and the 5-Year Rule
9 Chapter 8: Retirement Planning Considerations: Beneficiaries, Trusts, and Estate Taxation
8.1 Beneficiary Selection: How Each Choice Changes the Payout and the Tax 8.2 Trusts as IRA Beneficiaries: See-Through, Conduit, Accumulation, and Special-Needs Trusts 8.3 Estate and Income Taxation of IRAs: Gross Estate, IRD, and the Section 691(c) Deduction
10 Chapter 9: Employer-Sponsored Plans: SEP IRAs
9.1 SEP IRA Plan Establishment, Form 5305-SEP, and Employer Eligibility 9.2 Statutory Employee Participation Requirements (Age 21, 3-of-5 Years, Compensation) 9.3 SEP Contribution Limits (25% up to \$72,000 for 2026) and SECURE 2.0 Roth SEP Option
11 Chapter 10: Employer-Sponsored Plans: SIMPLE IRAs
10.1 SIMPLE IRA Establishment: Form 5305-SIMPLE vs. Form 5304-SIMPLE 10.2 Employee Salary Reduction Contributions and SECURE 2.0 Higher Limits 10.3 Employer Contribution Formulas: 3% Dollar-for-Dollar Match vs. 2% Non-Elective 10.4 The 2-Year Rule, 25% Early Distribution Penalty, and SECURE 2.0 Roth SIMPLE Option 10.5 Employer Tax Benefits of SEP and SIMPLE Plans: Deductions, Timing, and Credits
12 Chapter 11: IRA Investments, Prohibited Transactions & Fiduciary Duties
11.1 Permissible vs. Prohibited IRA Investments (Collectibles, Life Insurance, S-Corp Stock) 11.2 Prohibited Transactions under IRC 4975 and Disqualified Persons 11.3 Consequences of Prohibited Transactions: Account Disqualification, Deemed Distributions, and Excise Taxes 11.4 Valuing Nontraditional Assets and Disclosing IRA Fees
13 Chapter 12: IRS Reporting, Tax Forms & Regulatory Compliance
12.1 Form 5498 Reporting: Contributions, Rollovers, Fair Market Value, and RMD Notices 12.2 Form 1099-R Reporting and Critical Distribution Codes (1, 2, 3, 4, 7, G, H, B, Q, T) 12.3 Form 5329 Excise Taxes, SECURE 2.0 Penalty Reductions (25%/10%), and Form 8606 Basis Tracking
10.1 SIMPLE IRA Establishment: Form 5305-SIMPLE vs. Form 5304-SIMPLE
Key Takeaways Explain This Topic AI
Under IRC § 408(p), eligible employers are limited to those who employed 100 or fewer employees earning at least $5,000 in compensation during the preceding calendar year.
A statutory two-year grace period applies if an employer exceeds the 100-employee limit, allowing continued plan sponsorship for two calendar years following the last qualifying year.
Under the exclusive plan rule of IRC § 408(p)(2)(D), employers cannot maintain another retirement plan for the same calendar year, subject to SECURE 2.0 Section 332 mid-year safe harbor 401(k) replacement relief.
Form 5305-SIMPLE designates a single Financial Institution (DFI) requiring mandatory penalty-free transfer rights for employees under IRC § 408(p)(7), whereas Form 5304-SIMPLE permits employees to select their own custodians.
Employers must establish a new plan between January 1 and October 1 and must deliver annual employee notices prior to the statutory 60-day election window running November 2 through December 31.
Last updated: October 2026
Statutory Framework of SIMPLE IRAs (IRC § 408(p))
The Small Business Job Protection Act of 1996 enacted Internal Revenue Code (IRC) Section 408(p), creating the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA). Congress designed the SIMPLE IRA to provide small business owners with a cost-effective, turnkey retirement savings vehicle that bypasses the burdensome administrative compliance associated with traditional qualified plans governed by the Employee Retirement Income Security Act of 1974 (ERISA).
Unlike traditional qualified 401(k) plans, a SIMPLE IRA plan is statutorily exempt from:
Annual non-discrimination testing, including the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests under IRC § 401(k) and § 401(m);
Top-heavy plan testing and minimum benefit rules under IRC § 416;
Annual reporting on the Form 5500 series (Annual Return/Report of Employee Benefit Plan).
In exchange for this complete exemption from complex testing and annual filings, the employer must strictly adhere to statutory requirements regarding employer eligibility, plan exclusivity, mandatory funding formulas, 100% immediate vesting, and rigid participant notice schedules.
Employer Eligibility: The 100-Employee Limit
Under IRC § 408(p)(2)(C)(i), an eligible employer is defined as an employer that had 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. When determining whether an employer meets the 100-employee threshold, several vital statutory rules apply:
Preceding Year Test: Eligibility is determined strictly based on compensation paid in the preceding calendar year. Current-year hiring increases do not retroactively invalidate eligibility for the current plan year.
The $5,000 Compensation Threshold: Only employees who earned $5,000 or more in the preceding calendar year are counted toward the 100-employee limit. An employer with 140 workers, of whom 50 earned less than $5,000, has only 90 qualifying employees and therefore satisfies the eligibility test.
All Employees Counted: Full-time, part-time, seasonal, and temporary employees who met the $5,000 threshold must be included in the count, regardless of whether they ultimately participate in the plan.
Controlled Groups and Affiliated Service Groups: Under IRC § 414(b), (c), (m), and (o), all employees of all corporations, trades, or businesses under common control, or forming an affiliated service group, must be treated as employed by a single employer. An entrepreneur owning two separate businesses with 60 qualifying employees each employs 120 aggregate employees and is ineligible to sponsor a SIMPLE IRA.
Leased Employees: Qualified leased employees under IRC § 414(n) who perform services on a substantially full-time basis for at least one year must be counted in the 100-employee determination.
The Statutory Two-Year Grace Period
Congress recognized that growing businesses could inadvertently exceed the 100-employee threshold while sponsoring an active SIMPLE IRA. Under IRC § 408(p)(2)(C)(i)(II), an employer that previously satisfied the 100-employee limit and established a SIMPLE IRA is granted a two-year grace period if it subsequently exceeds 100 employees.
The employer continues to be treated as an eligible employer for the two calendar years following the last calendar year the employer satisfied the 100-employee test .
Example: An employer had 95 qualifying employees in 2023. In 2024, the business expanded to 115 qualifying employees. Because 2023 was the last qualifying year, the employer remains eligible to maintain the SIMPLE IRA for calendar years 2025 and 2026. If the workforce remains above 100 employees in 2026, the employer cannot maintain the SIMPLE IRA for 2027 and must terminate or transition the plan by December 31, 2026.
Merger and Acquisition Exception: Under IRC § 410(b)(6)(C), the two-year grace period does not apply if the workforce expansion results from an acquisition, disposition, merger, or similar corporate transaction. In such corporate restructuring events, special transition rules govern the duration of plan maintenance.
Employee Eligibility to Participate (IRC § 408(p)(4))
Once an employer is eligible, the plan must cover every employee who received at least $5,000 in compensation from the employer during any 2 preceding calendar years (they need not be consecutive) and is reasonably expected to receive at least $5,000 during the current year . The employer may use less restrictive requirements (for example, $0 or one prior year), but not more restrictive ones. The only employees who may be excluded are those covered by a collective bargaining agreement in which retirement benefits were bargained in good faith and nonresident aliens with no U.S.-source earned income. Unlike a SEP, the SIMPLE IRA has no minimum age requirement.
The Exclusive Plan Rule and SECURE 2.0 Section 332 Exception
Under IRC § 408(p)(2)(D), a SIMPLE IRA must generally be the exclusive retirement plan maintained by the employer. An employer cannot sponsor a SIMPLE IRA if the employer (or any predecessor employer) maintains another tax-qualified retirement plan to which contributions were made, or benefits were accrued, for service in any year in that same calendar year.
Prohibited co-existing plans include:
- Qualified pension, profit-sharing, or stock bonus plans under IRC § 401(a);
- Qualified cash or deferred arrangements under IRC § 401(k);
- Tax-sheltered annuity arrangements under IRC § 403(b);
- Simplified Employee Pensions (SEPs) under IRC § 408(k);
Governmental plans established for government employees (other than 457(b) plans).
Because IRC § 219(g)(5)(A)(iii), which the exclusive-plan rule cross-references, excludes 457(b) plans, maintaining a 457(b) plan does not by itself violate the exclusive-plan rule.
The SECURE 2.0 Section 332 Mid-Year Replacement Breakthrough
Historically, an employer locked into a SIMPLE IRA could not terminate the plan mid-year to transition to a 401(k) plan because doing so violated the exclusive plan mandate. Section 332 of the SECURE 2.0 Act of 2022 created a major statutory exception effective for plan years beginning after December 31, 2023:
An employer may elect to terminate a SIMPLE IRA mid-year if the employer immediately replaces the SIMPLE IRA with a safe harbor 401(k) plan (IRC § 408(p)(11)); employer contributions remain due on compensation earned through the termination date (Notice 2024-2, Q&A G-2).
The transition requires the safe harbor plan to take effect on the day immediately following the termination date of the SIMPLE IRA.
Employees must receive formal written notice of the mid-year termination and transition at least 30 calendar days prior to the termination date.
Combined elective deferrals across both the terminated SIMPLE IRA and the replacement safe harbor plan are capped by a weighted prorated formula to ensure the aggregate statutory limit under IRC § 402(g) is not exceeded.
Model Establishment Forms: Form 5305-SIMPLE vs. Form 5304-SIMPLE
Employers implement a SIMPLE IRA using standardized IRS model forms. The employer selects between two distinct administrative models:
Form 5305-SIMPLE: Designated Financial Institution (DFI)
Under Form 5305-SIMPLE, the employer selects a single Designated Financial Institution (DFI) —typically a bank, trust company, or brokerage firm—to serve as the sole repository for all plan contributions.
Payroll Streamlining: The employer's payroll department remits one single aggregate contribution (covering all employee deferrals and employer matching/non-elective amounts) to the chosen DFI each pay period.
Institutional Commitments: The DFI must formally agree in writing to serve as DFI, coordinate plan recordkeeping, and furnish the employer with the mandatory annual Summary Description by November 1 preceding the plan year.
The Statutory DFI Transfer Mandate (IRC § 408(p)(7)): Because employees are required to have their initial accounts established at the employer's chosen institution, the law protects employee freedom of choice. Under IRC § 408(p)(7), any employee who does not wish to maintain their account at the DFI has the legal right to transfer their entire balance, or ongoing monthly/payroll contributions, to another SIMPLE IRA (or Traditional IRA after the two-year period) at an institution of their choosing without cost or penalty .
If an employee exercises this transfer right during the annual 60-day election window, the DFI cannot charge account maintenance fees, transfer fees, surrender charges, or transaction commissions for executing the transfer.
Form 5304-SIMPLE: Non-Designated Financial Institution
Under Form 5304-SIMPLE, the employer does not choose a Designated Financial Institution. Instead, each eligible employee selects the financial institution, bank, or mutual fund company where their personal SIMPLE IRA is maintained.
Employee Discretion: Each employee completes their own account application with their chosen custodian and provides account wiring instructions to the employer's payroll department.
Payroll Burden: The employer must disburse payroll deductions and matching contributions to multiple distinct financial institutions across the banking and brokerage industry.
Absence of DFI Transfer Rules: Because the employee independently selected their custodian, the statutory penalty-free transfer mandate under IRC § 408(p)(7) does not apply to the employer or any specific financial institution.
Employer Reporting Responsibility: The employer is directly responsible for drafting and distributing the annual employee notice and summary description, rather than receiving a pre-packaged summary from a DFI.
Technical Comparison: Form 5305-SIMPLE vs. Form 5304-SIMPLE
Feature Form 5305-SIMPLE (DFI Model) Form 5304-SIMPLE (Non-DFI Model)
Selection of Institution Employer selects one Designated Financial Institution (DFI) Each employee selects their own financial custodian
Contribution Remittance Single aggregate remittance to the DFI Multiple remittances disbursed to various custodians
Transfer Mandate (IRC § 408(p)(7)) Mandatory transfer right to external IRA without fee or penalty Not applicable; employee chose original institution
Summary Description Provider DFI must prepare and deliver to employer by November 1 Employer must prepare or obtain summary description
Payroll Complexity Low (one destination for all payroll files) High (multiple custodian feeds and account numbers)
Filing with the IRS Never filed with the IRS; retained by employer Never filed with the IRS; retained by employer
Establishment Deadlines and the Annual 60-Day Election Window
Strict statutory deadlines govern the execution and maintenance of SIMPLE IRA plans:
Plan Establishment Deadlines
New SIMPLE IRA Plan: A new plan may be established effective on any date between January 1 and October 1 of the calendar year. A business establishing its first SIMPLE IRA cannot set an effective date later than October 1.
New Business Exception: A new business created after October 1 may establish a SIMPLE IRA as soon as administratively feasible after the business begins operations.
Predecessor Plans: If the employer previously maintained a SIMPLE IRA, a new plan can only be established effective on January 1 of a subsequent calendar year.
Calendar Year Mandate: All SIMPLE IRAs must operate on a calendar year basis (January 1 through December 31). Fiscal-year plan operation is prohibited.
The Mandatory 60-Day Election Window
Every year, employers must provide an annual election period during which eligible employees may make or modify their salary reduction agreements:
Timing: The statutory election window runs for 60 consecutive days , specifically from November 2 through December 31 immediately preceding the relevant plan year.
Mandatory Employee Notice: Immediately before the 60-day election period (no later than November 1), the employer must deliver a written notice to each eligible employee detailing:
The employer's elected contribution formula for the upcoming year (3% dollar-for-dollar match, reduced match, or 2% non-elective contribution);
A copy of the plan summary description (provided by the DFI under Form 5305-SIMPLE or prepared by the employer under Form 5304-SIMPLE);
Written procedures explaining how to execute or modify salary reduction elections.
New Employees: For an employee who becomes eligible mid-year, the employer must provide a 60-day election window that includes either the 60-day period before the employee becomes eligible or the day they become eligible.
Bank Administrative Scenario: Institutional Intake and DFI Operational Execution
A commercial bank's trust division meets with the Chief Financial Officer of Precision Optics LLC, a manufacturing firm with 65 employees earning over $5,000. Precision Optics currently sponsors no retirement plan and wishes to establish a SIMPLE IRA for the upcoming calendar year.
The CFO is evaluating whether to adopt Form 5305-SIMPLE or Form 5304-SIMPLE. The bank's IRA specialist explains that adopting Form 5305-SIMPLE designates the bank as the DFI, which simplifies the company's payroll by consolidating all bi-weekly remittances into a single electronic file sent directly to the bank. However, the specialist emphasizes two non-negotiable compliance duties:
The bank must generate and deliver the annual Form 5305-SIMPLE Summary Description to Precision Optics by November 1, enabling the company to issue employee notices prior to the November 2 through December 31 election window.
If any employee elects to have their SIMPLE IRA contributions transferred to an external broker-dealer, the bank must execute that transfer without assessing any custodial, transfer, or liquidation fees pursuant to IRC § 408(p)(7).
Precision Optics executes Form 5305-SIMPLE on September 15 with an effective date of January 1. The bank opens individual custodial accounts for all participating employees, schedules the annual notice delivery for October 25, and flags the core accounting system to waive all outgoing transfer fees for participants exercising their DFI transfer rights.