A client maintains a SIMPLE Plan and has elected to make matching contributions thereunder. The client desire to establish a qualified plan and will probably establish (1) a safe-harbor 401(k) plan and (2) a cash balance plan. Of course, the client will receive substantial benefits under the new plans.

Should we establish the new plans as of 1/1/07? Alternatively, are we able to freeze the SIMPLE effective 9/30/06 and establish the new plans effective 10/1/06. Of course, we would need to reduce deferrals under the new 401(k) plan by the amounts deferred under the SIMPLE. Additionally, we would need to insure that 415 limits had not been violated.

Under the new plans, NHCEs will receive larger contributions than they currently receive under the SIMPLE.

I recall once talking with an IRS official and he indicated it was the IRS' desire not to have to include Code Section 415 language in SIMPLE plan documents that prompted the IRS to require that adopters of SIMPLE plans not maintain other qualified plans. If that is the case, we should be able to freeze the SIMPLE 9/30/06.

Thanks in advance for your assistence.

If you put in the other plans effective in 2006, then the SIMPLE is invalid for all of 2006. See IRC 408(p)(2)(D) & 408(p)(6)©. It can be done, but it is a hassle.

Jim (Hi).

It may be worth the hassle. The employer can include the amounts on the W-2. [See instructions for box 12, Code S on W-2 Form; compare to specific instructions for Code S box 12 (401(k) plans).] Nondeductible penalty would seems to disappear (amounts reported, best employer can do). All contributions for year are excesses. All elective contributions would however count under 402(g)--the best I can figure out.

It would almost appear that the employee must remove the amount, However, there is no form or instruction (or guidance) to suggest so. The 5329 do not include SIMPLE IRAs as being subject to the 6% penalty. There are no distribution Codes for these purposes. Go figure.

In any event, it might be helpful for the employer to issus a Notice explaining what happened, the excess amount was included in box 1 of form W-2 for 2006, and how to request a correcting distribution from their SIMPLE IRA trustee or custodian (upon the advice of their tax counsel).

Simple-IRAs are not subject to 415 limits.

Jim, the 25% percent early distribution penalty should not apply, see ASPPA IRS Q&A # 376, 2000 National Conf. [More fuly discussed in the SIMPLE, SEP and SARSEP AB Q 14:162-14:165 (11th Ed).]

Hi Gary,

Yes, we've done this a few times, small employers where we are putting in DB or cross-tested, so the owners definitely felt it was worth it. But still a hassle to correct the payroll and explain to the employees, seems the contributions could remain as personal IRA contributions subject to IRA limits and may or may not be deductible.

Jim,



A hassle-agreed; but SIMPLE IRA can not accept "personal IRA contributions." It should be also be noted that the 6% excess contribution penalty, however, does not seem to apply. If amounts treated as W-2 compenation by employer--to avoid the 10% nondeductible contribution penalty--and the amounts not withrawn in some sort of correcting distribution, the amount may be taxed twice. There are no reporting codes!