IRS Form 5305-SIMPLE Guide: DFI Plan Setup Rules & Filing

Introduction: What Is IRS Form 5305-SIMPLE?

IRS Form 5305-SIMPLE, titled Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution, is a model plan document published by the Internal Revenue Service (IRS). It is governed under Section 408(p) of the Internal Revenue Code (IRC).

This form enables small business owners to establish a tax-favored SIMPLE IRA retirement plan for themselves and their employees. Unlike general retirement plans where workers can select any bank, Form 5305-SIMPLE is designed specifically for employers who select a single Designated Financial Institution (DFI) to receive all initial employee contributions.

Because Form 5305-SIMPLE is a standardized, IRS-approved model agreement, executing it provides a ready-to-use retirement plan framework without the need for expensive legal fees or complex third-party plan administration.

Purpose of the Form

Setting up a traditional qualified retirement plan like a 401(k) often involves significant administrative expenses, annual non-discrimination testing, and complex government filings. Form 5305-SIMPLE provides small employers with a cost-effective, streamlined alternative.

By partnering with a single Designated Financial Institution, the employer centralizes plan administration, making payroll salary deductions and employer matching deposits simpler and more efficient. The financial institution handles account onboarding, custody, and annual tax reporting.

The form legally establishes the rules of the workplace plan, defining employee eligibility, mandatory employer contributions, immediate 100% vesting, and special rules allowing employees to transfer their balances without penalty.

Who Needs to File / Use This Form

Form 5305-SIMPLE is used by small business owners, sole proprietors, partnerships, and corporations who want to set up an employer-sponsored SIMPLE IRA plan. You are eligible to adopt this model plan if you meet the following conditions:

• 100 or Fewer Employees: You employed 100 or fewer employees who earned at least $5,000 in compensation during the preceding calendar year.
• No Other Active Retirement Plan: You do not maintain any other active qualified retirement plan (such as a 401(k), SEP IRA, profit-sharing, or defined benefit plan) for which contributions were made or benefits accrued during the calendar year.
• Designated Financial Institution Selected: You have arranged with a specific bank, brokerage firm, or mutual fund company to act as the single depository for all initial plan contributions.

Who Is Exempt / Ineligible to Use It

Not every business is eligible to adopt Form 5305-SIMPLE. An employer cannot use this model agreement under the following circumstances:

• Over 100 Employees: The business exceeds the 100-employee limit (subject to a statutory two-year transition grace period for growing companies).
• Dual Retirement Plans: The employer maintains another active retirement plan covering employees in the same calendar year.
• Employee Choice of Financial Institution: If you want your employees to select their own individual financial institutions rather than using a single DFI, you must use Form 5304-SIMPLE instead.
• Custom Prototype Plans: Employers using a custom-drafted prototype SIMPLE IRA document provided directly by an investment firm do not need this model IRS form.

When to File / Adopt / Execute

Form 5305-SIMPLE is an agreement executed within your business rather than an annual tax filing. However, employers must observe strict calendar deadlines:

• Initial Plan Setup: For an existing business, a new SIMPLE IRA plan must be established between January 1 and October 1 of the calendar year. A business established after October 1 can adopt the plan as soon as administratively feasible.
• Annual 60-Day Notice Period: Employers must provide the completed form, annual summary description, and election notice to all eligible employees during the annual 60-day window, which runs from November 2 through December 31 for the upcoming calendar year.
• Salary Deferral Deposits: Employee salary reductions must be transferred to the DFI as soon as administratively feasible, but no later than 30 days after the end of the month in which the amounts were withheld.

Where and How to File / Retain

An essential rule regarding Form 5305-SIMPLE is that it is never mailed to or filed with the IRS. It is an internal legal agreement maintained by the employer.

• Employer Permanent Records: The business owner must sign, date, and securely store the original executed Form 5305-SIMPLE in the company’s permanent benefits records.
• Financial Institution Copy: A signed copy is provided to the Designated Financial Institution to establish the master plan relationship.
• Employee Distribution: A completed copy of the agreement, the Summary Description prepared by the DFI, and a Salary Reduction Agreement must be delivered to every eligible worker prior to the annual 60-day election period.

Step-by-Step Instructions to Fill Form 5305-SIMPLE

Form 5305-SIMPLE consists of employer identifying details, DFI selections, eligibility standards, contribution choices, and employee election forms.

Section	Key Focus Areas	What to Enter / Select
Header Section	Employer & DFI Details	Enter the legal business name, address, Employer Identification Number (EIN), and the legal corporate name and address of the Designated Financial Institution (DFI).
Article I: Eligibility	Participation Rules	Specify prior-year compensation requirements (up to $5,000) and expected current-year earnings for eligibility. You can exclude union workers covered by collective bargaining and nonresident aliens.
Article II: Contributions	Funding Formula	Select either a dollar-for-dollar matching contribution up to 3% of compensation (or a reduced percentage of not less than 1% under statutory limits) OR a 2% non-elective contribution for all eligible employees.
Article III: Other Rules & DFI	Transfers & Vesting	Affirms immediate 100% vesting and explains the statutory right of employees to transfer their balance from the DFI to another institution without cost or penalty.
Employer Signature	Plan Adoption	The authorized business owner or corporate officer signs and dates the document to confirm adoption.
Salary Reduction Agreement	Employee Election	Completed by participating employees to select their salary deferral percentage (or fixed dollar amount per pay period) and authorize payroll deductions.

Understanding Mandatory Employer Contributions (Article II)

Under a SIMPLE IRA, employer contributions are 100% mandatory and immediately 100% vested. You must choose between matching employee deferrals dollar-for-dollar up to 3% of their compensation or making a 2% non-elective contribution for all eligible workers, regardless of whether they choose to defer their own wages.

DFI Transfer Rights (Article III)

Federal law protects employee choice even when a DFI is used. Article III requires the employer and DFI to notify workers that they have the right to transfer their account balance from the DFI to another SIMPLE IRA without incurring any transfer fees or penalties during the annual 60-day election window.

Required Documents and Information Needed Before Filling

Before completing and executing Form 5305-SIMPLE, assemble the following business and payroll records:

• Employer Information: Legal business name, physical address, and federal Employer Identification Number (EIN).
• DFI Agreement: Corporate name, address, and custodial contact information for your chosen financial institution.
• Payroll Summaries: Prior-year payroll records to verify which workers earned at least $5,000 in compensation.
• DFI Summary Description: The annual summary description document provided by the DFI detailing account rules and transfer options.

Common Mistakes to Avoid

• Mailing the Form to the IRS: Submitting Form 5305-SIMPLE to the IRS is unnecessary and creates administrative confusion; keep it safely in your company records.
• Missing the October 1 Setup Deadline: Attempting to establish a new SIMPLE IRA plan for the current calendar year after October 1 is not permitted under IRS rules.
• Failing to Disclose DFI Transfer Rights: Neglecting to inform employees that they can transfer their funds out of the DFI without cost or penalty during the election period.
• Skipping the Annual 60-Day Notice: Failing to distribute the annual election notice to eligible workers between November 2 and December 31.
• Late Remittance of Deferrals: Holding employee wage deferrals past the 30-day statutory deposit deadline.

Penalties and Compliance Risks

While Form 5305-SIMPLE does not carry a direct late-filing fee, operational failures carry steep regulatory penalties under IRS and Department of Labor (DOL) rules:

• Failure-to-Notify Penalties: Under IRC Section 6693(c), employers who fail to provide the mandatory annual 60-day notice and summary description to eligible workers face a penalty of $50 per day per employee until the notice is provided.
• Department of Labor Penalties: Late deposit of employee salary deferrals is treated as a prohibited transaction, resulting in mandatory interest payments and excise taxes on Form 5330.
• Plan Disqualification: Violating contribution formulas or eligibility rules can disqualify the plan, resulting in the loss of tax deductions and requiring expensive corrections under the IRS Employee Plans Compliance Resolution System (EPCRS).
• 25% Early Withdrawal Penalty: Employees who withdraw funds from their SIMPLE IRA within the first 2 years of initial participation face an increased 25% early distribution penalty rather than the standard 10% penalty.

Related Forms and Schedules

When operating a SIMPLE IRA plan with a Designated Financial Institution, you will encounter these related IRS tax forms:

• Form 5304-SIMPLE: Savings Incentive Match Plan for Employees (used when employees select their own financial institutions).
• Form 5305-SA: SIMPLE Individual Retirement Custodial Account (used by employees to open individual accounts at the DFI).
• Form 5305-S: SIMPLE Individual Retirement Trust Account.
• Form W-2: Wage and Tax Statement, where employee salary deferrals are reported in Box 12 using Code S.
• Form 5498: IRA Contribution Information (issued annually by the DFI to report contributions).
• Form 5330: Return of Excise Taxes Related to Employee Benefit Plans (used if payroll deposits are remitted late).
• Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, etc.

Frequently Asked Questions (FAQs)

1. Do I need to send Form 5305-SIMPLE to the IRS?

No. Form 5305-SIMPLE is an agreement between the employer, the Designated Financial Institution, and participating employees. It is kept in your permanent business records, never mailed to the IRS.

2. What is a Designated Financial Institution (DFI)?

A DFI is a specific bank, trust company, or brokerage firm selected by the employer to receive all initial employee salary deferrals and employer matching contributions under the SIMPLE IRA plan.

3. What is the difference between Form 5305-SIMPLE and Form 5304-SIMPLE?

Form 5305-SIMPLE is used when the employer designates a single financial institution for all initial deposits. Form 5304-SIMPLE is used when each employee is allowed to choose their own separate financial institution.

4. Can an employee move their money out of the DFI?

Yes. Employees have the statutory right to transfer their account balance from the DFI to another SIMPLE IRA at any financial institution of their choice without incurring any transfer fees or penalties.

5. Do I have to file an annual Form 5500 for a SIMPLE IRA?

No. One of the greatest benefits of a SIMPLE IRA established under Form 5305-SIMPLE is that it is completely exempt from annual Form 5500 filing requirements.

6. Can an employer change the contribution formula from year to year?

Yes. Employers can switch between the 3% matching contribution and the 2% non-elective contribution annually, provided they notify eligible employees during the 60-day election window before the new calendar year begins.

Conclusion

IRS Form 5305-SIMPLE is an efficient, pre-approved model agreement that allows small businesses to establish a workplace retirement plan with a single financial partner. By consolidating deposits with a Designated Financial Institution and eliminating burdensome Form 5500 filings, it offers an accessible path to workplace retirement benefits.

To ensure your plan remains fully compliant, execute the form before October 1, distribute the annual 60-day election notice and DFI transfer disclosure every November, deposit payroll deferrals promptly, and keep all executed agreements safely in your permanent company records.