Form 5304-SIMPLE vs. 5305-SIMPLE: Which One Do You Sign?

Forms 5304-SIMPLE and 5305-SIMPLE are two of the U.S. Internal Revenue Service (IRS) free model documents for creating a SIMPLE Individual Retirement Account (IRA) plan, but differ by only one detail: Form 5304-SIMPLE allows employees to select their own bank or other financial institution for their SIMPLE IRA,^[1] whereas Form 5305-SIMPLE requires all accounts be directed to a single designated financial institution (DFI) which is selected by you.^[2] Once signed, whatever version fits your arrangement should be retained as part of your company’s record keeping files and never submitted to the IRS. Most small employers that desire just one custodian and easy payroll use 5305-SIMPLE, while those that want to give employees full freedom of choice use 5304-SIMPLE.

What do Forms 5304-SIMPLE and 5305-SIMPLE do?

The purpose of both versions are to perform the exact legal function: by having an employer sign a written plan document, they create the SIMPLE IRA Plan. A SIMPLE IRA plan does not exist until an employer signs. There are also two fill-in-the-blank model plans that were published by the IRS so small employers do not need a lawyer. Form 5304-SIMPLE is the version of the SIMPLE IRA plan which is not for use with a designated financial institution, so each participant selects their own custodian and therefore will have multiple custodians. Form 5305-SIMPLE is the same plan but it is designed to be utilized with a single Designated Financial Institution (DFI). By signing either one of the prior forms prior to completing the October 1 setup deadline, an employer has created the SIMPLE IRA Plan. Everything else is identical: the contribution limits, the 3% match or 2% nonelective requirement, and the 7-business-day deposit rule.

The form has an IRS label called Form, but neither document is a tax filing. You will never send anything to the IRS for this type of account, and SIMPLE IRAs file no Form 5500 either.^[3] The signed document will be kept with your other business papers to prove that the SIMPLE Plan was adopted and what provisions were included. The IRS offers free model SIMPLE Plan documents that can be used as prototypes. Most large custodians also provide their own IRS-approved prototype SIMPLE Plans, which are just as valid, so you do not have to use the IRS models at all. When using a prototype, you should read the election information carefully because some may select the contribution formula and/or the eligibility terms for you.

What is the one difference between the forms?

The two versions differ in just this respect: who has the authority to select the financial institution for each employee’s SIMPLE IRA. Under Form 5304-SIMPLE (the “open architecture” version) each participant selects a financial institution at which he/she would like to establish his/her account and then advises you where to direct the contribution. As such, your payroll may be directed to as many different institutions as you have participants. On the other hand, under Form 5305-SIMPLE (the “closed architecture” version), you are required to name a single financial institution and all accounts opened by your employees will be established with that named financial institution. However, in consideration for having a closed architecture plan, the designated financial institution (“DFI”) must let your employees move their entire balance to another simple retirement account without any cost or penalty,^[2] so nobody is trapped.

When does each form make sense?

Choose 5305-SIMPLE for simple operations and 5304-SIMPLE if employee choice is the top consideration. For a 5 or 15 person business, with one custodian, you'll have just one login, one contribution file per payroll, and one area to reconcile, therefore 5305-SIMPLE is usually the best option. It is also the structure in which the majority of providers (IRAPilot included) were developed, due to the fact that a single DFI provides your payroll a singular destination to fund and a singular deposit deadline to follow each pay cycle. The justification for selecting 5304-SIMPLE is somewhat narrow: either your employees already have strong preferences or a key employee has insisted upon a particular brokerage. Your decision is on you as an employer, since each additional institution requires your payroll to fund it within 7 business days.

What notice obligation is built into the form?

The Model Form is not simply a Plan Document. It is also where your Notice to Eligible Employees are located (i.e. Summary of Eligibility), the Elected Contribution Formula, and Where Your Money Goes. The Model Form is the Annual Notice that must be given to all eligible employees prior to each year’s 60-day election period. It must be given to eligible employees in writing by November 1 along with a Salary Reduction Agreement. If you fail to give the notice, it is a Compliance Failure even if the Plan Document is complete and correct, and the correction will involve correcting past elections and documentation. This is one of the recurring obligations IRAPilot prepares for you: it drafts the notice each year and reminds you until you hand it out.

The elections you make on the form obligate you for the plan year because SIMPLE IRA provisions generally cannot be changed mid-year. You select the eligibility criteria (the IRS allows employers to limit participation to employees who have earned $5,000 or more in any 2 prior years and are projected to earn $5,000 for the current year),^[1] a contribution method (either the 3% match or the 2% non-elective, discussed at length in SIMPLE IRA Employer Match Rules), and an effective date. On 5305-SIMPLE you also identify the designated financial institution.

The Bottom Line

Form 5304-SIMPLE and Form 5305-SIMPLE are essentially the same free IRS plan document with one key difference: 5304 lets each employee choose their own custodian while 5305 sends every account to a single institution you designate. Neither document ever gets filed with the IRS. Most small teams usually go with 5305-SIMPLE for simpler payroll. Sign by October 1, keep the form on file and deliver its notice section by November 1 each year.

This guide is educational and summarizes IRS rules for SIMPLE IRA plans. It is not investment, legal, or tax advice. Your plan documents and current IRS limits control. Talk to your tax advisor about your business's circumstances.