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changing from a 401(k) to a SIMPLE


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Have a Potential client who currently sponsors a 401(k) Profit Sharing Plan that is top-heavy. Under current law, they feel the plan is useless, because of the top heavy min. I have explained under EGTRRA, they can utilize the safe harbor match and contribute upto the max. 401(k) and match $ for $ upto 4% of what they contribute and not worry about top heavy. With all that, they are considering changing to a SIMPLE IRA.

Does EGTRRA apply to SIMPLE IRAs? If so, can they contibute upto 7,000 and match another 3% for those who defer based on any salary. In other words, what if someone earns 10,000 can they contribute 7K? And do they have to worry about top heavy given the fact the old plan was? Any help is appreciated.

I still think 401(k) safe harbor is better....

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Not sure if EGTRRA applies to Simples - although I think it does.

However, remember that since you already have a 401(k) for 2002, the Simple plan could not start until 1/1/03 (assuming that you terminated the 401(k) prior to then.

Also, you already know if the 401(k) if top-heavy for 2002 based upon 12/31/01 ratio. If any KEY's have deferred to the 401(k), the sponsor is stuck with the Top-Heavy Minimum required contribution for 2002, regardless if they terminate.

Finally, I totally concur with your advice - they should adopt a Safe-Harbor Matching Provision. This will likely cost them no more than the Simple, but allow for much higher contribution levels.

Some fairly firm client education seems to be the order of the day in this situation.

Good Luck!

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I agree with actuarysmith.

Regarding the SIMPLE, EGTRRA does apply. The employee/participant may defer $7,000 or 100% of compensation, and the employer may match $for$, up to 3% of the employee’s compensation.

Life and Death Planning for Retirement Benefits by Natalie B. Choate



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