Rules on Rolling Over Employee IRA Accounts

by Jane Meggitt

Smaller businesses may opt to fund its employees' retirement either through a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) individual retirement account (IRA) plan. Investment rules for these plans are the same as for an individual's own IRAs. The Internal Revenue Service's (IRS's) rules on rolling over the employee IRA account depends on the type of plan.


SEPs allow employers or self-employed people to put aside funds in this type of IRA for themselves and employees. In a SEP plan, the employer makes direct contributions to these traditional IRAs for all employees, including the employer. The maximum contribution to an annual SEP is up to one-quarter of the employee's pay and is tax-deductible. The SEP IRA is offered by most financial institutions, and is a low-cost alternative to employer-sponsored retirement plans such as 401(k)s. By law, every employee, even seasonal or part-time workers, must be enrolled to qualify for a SEP.


Employers with less than 100 employees who earn at least $5,000 annually may establish SIMPLE IRA plans. All employees are calculated in the 100 employee limit, whether or not they participate in the plan. A SIMPLE IRA plan may not be established if an employer contributes to or maintains any other type of retirement plan. The employer may make an annual match of the employee's contribution up to 3 percent of the individual's compensation. Under IRS rules, the employer may reduce this limit to a low of 1 percent in no more than two years out of a five year period.

SEP Rollovers

Participants in a SEP IRA may roll money over without tax consequences to another SEP IRA if they leave the employer, to a traditional IRA or a new employer's qualified retirement plan, as long as that particular plan permits rollovers. If the money is withdrawn from the SEP IRA and not rolled over, it is subject to ordinary income tax for that year. Like traditional IRAs, SEP IRA owners cannot begin taking distributions until reaching the age of 59 1/2 and must take mandatory distributions by the age of 70 1/2.

SIMPLE IRA Rollovers

If the employee has participated in a SIMPLE IRA plan for a minimum of two years, the funds may be rolled over to a traditional IRA without penalty. A rollover from one SIMPLE IRA to another SIMPLE IRA is not subject to the two-year minimum. While the SIMPLE IRA also has the same distribution age requirements as the traditional IRA, withdrawals made from a SIMPLE IRA plan if held less than two years and the employee is under age 59 1/2 incur a 25 percent penalty. Typical IRA early withdrawals incur a 10 percent penalty.

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