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SIMPLE is replaced by a Qualified Plan


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Fiscal Year employer (3/31). Has had a SIMPLE Plan for a few years, wants to start a DB Plan for this year end, 3/31/04.

As I understand it a SIMPLE plan has to be a calendar year plan. The ER contributions made for the year ending December 31, 2003 should not be an issue - could remain in the SIMPLE. Would they count against the 404 limit for the year ending 03/31/04?

Would plan have to be effective 01/01/04 for this to be true? And thus short year issues arise...

Otherwise, deferrals & ER contributions since 4/1/03 would be invalidated? Or since 01/01/03?

If the SIMPLE is "invalidated" I think I read that the deferrals and ER contribs are included in Box 1 of W-2. So new 2003 W-2s are needed? Grossed up by the 2003 ER contributions...

And 2003 contribs must be withdrawn by April 15, 2004? (408(d)(4)) And the Jan/Feb/March 2004 contributions would have to be withdrawn by the employees as under 408(d)(4) by April 15, 2005. If done so there would be no 6%, 10% or 25% penalty. (No penalty). Correct?

As the SIMPLE is "invalidated" so does that mean that the ER would not be required to make the ER contribution for 2004? Although at one time there was an announcement commiting him to the contris.

Thanks for wading through this and any comments...

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Unless a short DB plan year is established (1/1/04-3/31/04), the simple-IRA that started on 1/1/03 would be invalidated. If the SIMPLE-IRA is invalidated, there may be state law issues--a promise was made. Any SIMPLE-IRA excess would be reported on Form W-2 in box 1 (but unlike a SARSEP, the excess is not to be reported in box 12).

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  • 3 weeks later...

I am looking at almost the same issue, except tha FY is 6/30 and the client is looking at a Comparability DC plan.

I agree that the PED should be 1/1/04, but my question is what compensation do we use for allocations and testing?

I assume we would need to use a full year for determining the HCEs, but I think we would need to use pay since the PED for the allocation and for calculaing the testing percentages. To use a full year's pay would be double dipping.

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