SIMPLE IRA 100 person rule - plan has less than 100 ees in 2005, more than 100 in 2006 and all subsequent years. Plan is eligible in 2006 because of the look-back rule, does the 2-year grace period include 2006 or start with 2007?

Yes,

2006 is the first lookback year. Your relief runs through 2007. (remember to apply the $5,000 rule to this count)

So, you are fine in the SIMPLE IRA plan for years 2007 & 2008. If your employee count doesn't get back under 100 by 2008, you are not fine for 2009.

I orginally misread the question. So, this is an edit. I actually edited twice to ensure I am communicating this correctly.

Hope this helps.

In case you want to do your own interpretation, the rule, abanky, says that if you no longer are an eligible employer, you can remain an eligible employer for the 2 years after the last year of eligibility. Eligibile employer status is based on prior year counts. So, in your situation, the last eligible year was 2006 (based on prior year, 2005, counts). Thus, 2-year future eligibility takes you through 2008. (See IRC Sections 408(p)(2)©(i), 401(k)(11)(A) and 401(k)(11)(D)(i), and Treas. Reg. Section 401(k)-4(b).)