I have a client who wants to terminate his SIMPLE plan and start a defined benefit plan. He has contributed some money to his SIMPLE FY 2000. My understanding is that once a contribution is made to the SIMPLE IRA, there is no workout so another plan such as a defined benefit plan can be started in the same year. The client must wait until Y2001. Is there a workaround for this issue or is the client stuck for 2000?

I think you hit the one exception to 408(p)(2)(D) provided that your new DB plan does not accue any benefits to anyone during 2000 which is permitted under the 411 rules. (A plan does not have to accrue benefits for the first two years - a summary, please read the law).

I am afraid I don't see the point of creating a pension plan with no accrual in the year as I don't see how you could generate any funding. I am not an actuary, but I think at the very least that the OBRA full funding limit would be zero since there is no credited service in the year in question.

I am not an actuary, but our actuaries have always funded plans based, mostly, upon future liabiities and there is credited service just a deferral of accrued benefit. Using the permitted accural method merely defers the recognition to the third year when the participant would "pop-up" with three years' accrued benefits. Kinda like cliff vesting. By the way, this is my idea, (I think it has merit naturally) but nowhere have I seen a discussion pro or con and I have not heard anything from IRS (and I'm not going to ask IRS). And it is still at the conjecture/we think it's ok stage. But, two different tax lawyers agreed to let their clients do this - both of them also guessing it's ok.

A DB CAN be started. If any accrual of benefits is provided for the year, then the SIMPLE IRA is invalidated and the SIMPLE IRA contributions become an excess contribution. The employee should remove them before the due date of their Federal Income Tax Return to avoid additional penalties (6%). The trustee will, in most likelyhood report any distribution as a taxable distributions (and possibly subject to the 25% penalty). There is also an employer issue: the making of nondeductible contributions. The IRS is silent in this regard. IMO the employer should treat the amount as wages. Arguably, the amounts are not subject to FICA or FUTA. The employee will have to explain why the amounts are not taxable twice (leaving only the gain subject to tax and a possible 25% penalty).