The SIMPLE 401(k) rules are a little different. Under the SIMPLE IRA rules, the SIMPLE must be the only plan maintained by the employer (unless the other plan is for unionized employees). Under the SIMPLE 401(k) rules, the employer may maintain another plan, providing the employees under the other plan are not eligible to participate in the SIMPLE 401(k) plan.
Therefore, it is possible that this would not be an issue in the first year, if service with a predecessor employer is allowed to be disregarded for eligibility purposes.
The two year grace period that applies to a SIMPLE 401(k) plan appears to apply only in cases where the business fails to meet the definition of “eligible employer”. An eligible employer is defined as follows:
QUOTE
1.401(k)-4 (b) Eligible employer —
(1) General rule. A SIMPLE 401(k) plan must be established by an eligible employer. Eligible employer for purposes of this section means, with respect to any plan year, an employer that had no more than 100 employees who each received at least $5,000 of SIMPLE compensation, as defined in paragraph (e)(5) of this section, from the employer for the prior calendar year.
(2) Special rule. An eligible employer that establishes a SIMPLE 401(k) plan for a plan year and that fails to be an eligible employer for any subsequent plan year, is treated as an eligible employer for the 2 plan years following the last plan year the employer was an eligible employer. If the failure is due to any acquisition, disposition, or similar transaction involving an eligible employer, the preceding sentence applies only if the provisions of section 410(b)(6)©(i) are satisfied.
In my opinion, you have until the end of 2005 to terminate the other plan, unless the employees who receive benefits under that plan are not eligible to participate in the SIMPLE 401(k)