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SIMPLE Plan is terminated and new plan is started


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We all know an employer cannot have a SIMPLE plan and another plan at the same time; however, what would happen if the employer had a SIMPLE Plan and terminated it today. then tomorrow he starts a traditional 401(k) or profit sharing plan, effective for the current plan year? could the new plan be effective retroactive to the first day of the plan year.

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You would be maintaining the SIMPLE plan in the same calendar year as the qualified plan. I don't see that it matters that the SIMPLE plan was maintained from Jan. - July and the qualified plan from August - Dec., you still maintained a SIMPLE plan in the same calendar year.

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Upon adoption of the qualified plan, all contributions in the SIMPLE for the year wd become excess contributions (and sd be reported in box 1 of Form 1040).

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Could you tell me what would happen if the Simple plan was less than 2 years old and the sponsor does decide to go ahead with another plan in the same plan year? I am concerned with the excise tax and also whether the employee would be subject to the 25% excise tax (for distributions within two years of plan establishment)

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Go to the ASPA website and view the 2000 IRS Q&A #36. This exact question is asked. The response was that the SIMPLE IRA is invalidated. The contributions would have to be returned by the due date of the employer's tax return. The 25% penalty would not apply.

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Summary & comment: If the excess are reported in box 1 of Form 1099, the excess nondeductible contribution penalty (which is determined at the end of the year) is not subject to the 10 percent penalty. The excess amount cannot be returned to the employer, nor forcibly paid out to the employees. They are subject to a 6 percent tax unless the employee corrects timely and properly.

All contributions to the SIMPLE generally become excess contributions if the employer maintains another plan covering any part of the calendar year the SIMPLE was established for.

If any amount (elective or nonelective, or gain) is returned to the employER, both the employer and trustee/custodian have entered into a prohibited transaction under the Code and under ERISA. They may also be liable for theft, conversion, and possibly breach of fiduciary duty under state law.

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I apologize, Gary Lesser is correct. I misread the Q&A. It states that they should be return by the due date of the employee's tax return. It does not state that they are returned through the employer. 408(d)(1) does apply provided that the requirements of 408(d)(4) are met. 408(d) deals with the taxation to the employee.

Again I apologize, I just misread it.

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