Lately, I've been struggling with the two-year rule for SIMPLE IRA rollovers (i.e., the prohibition on rolling over amounts in a SIMPLE IRA to a plan other than a SIMPLE IRA within the first two years). Is anyone aware of any waiver of this rule where the SIMPLE IRA is terminating because the employer is disolving? For employees who are younger than 59 1/2, this rule kicks the early distribution penalty up to 25%. These employees end up losing a quarter of their accounts in a forced distribution, because the plan had to be terminated based on a dissolution they had no control over. This doesn't seem fair, but I can't find anything that would alter the result. Any thoughts?

The two-year rule is set in stone. The 25% penalty does not apply on account of plan termination. It may apply to distributions from the SIMPLE IRA, unless an exception applies. The trustee/custodian should also be informed of the termination and that they are to accept no further contributions. Hope this helps.

Gary, thanks for your reply. I agree that the 25% penalty technically stems from the distribution rather than the termination, but doesn't termination of a plan require distribution of all the plan's assets?

BTG, the money is already in an IRA. What distribution?

No. This is unlike qualified plans and 403(b)s where the assets are required to be distributed when terminated. Under a SIMPLE IRA, the assets can remain in the participant’s account after termination.

Thanks all for your replies. I don't deal with SIMPLE IRAs much and that clarification helps a lot.

Let's say the employer is not dissolving but just in bad financial shape, and looking to cut costs. Can the SIMPLE IRA be terminated mid-year?

No, SIMPLE IRAs must be maintained on a whole-calendar-year basis.

http://www.irs.gov/retirement/article/0,,i...tml#termination