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SIMPLE IRA in place, 401(k)/PS Plan wants to be added


Guest KeithinClev
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Guest KeithinClev

Hello,

I was always under the impression that a 401k/PS could not be started in the same plan year once a SIMPLE IRA contribution was made during that year.

I have been reading other posts, and it seems there may be a way around this, although it might be a mess.

It may be worth looking into because of 2 employees wanting to max out the 415 limit. The company has 5 people and only 2 SIMPLE contributions have been made for '05.

What is the process for this, and if a 401(k) can be started, can SIMPLE balances be rolled into the plan this year? (Everyone has had SIMPLE > 2 yrs.)

Thanks.

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  • 2 weeks later...

The simple will simply be invalidated by the 2005 adoption of the QP for the year.

The excess in the SIMPLE can be dealt with (on W-2 and timely removal by e/ee).

The remaining amounts in the simple can be rolled over into an IRA (2-year rules met) and then rolled into the QP if it permits.

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  • 1 month later...
Guest Judy S

Can I reopen this topic to get details of exactly how this would work?

I have an employer who deposited deferrals and match in a SIMPLE IRA plan in January 2005. They then adopted a new 401(k) plan effective 2/1/05 and started depositing deferrals and match in that plan.

I see that the January 2005 contributions are invalidated, but would like details on exactly how to fix.

If I understand correctly, the 2005 W-2's can be fixed by adding the January deferrals to taxable income and withholding taxes on those amounts.

The January deferrals + earning must then be withdrawn, but the holder of the assets (Vanguard in my case) will issue a 1099-R. Can they use code "8" and show zero as taxable amount?

What happens to the match? Can that be returned to the employer with earnings? If so, should 1099-R's be issued to participants for the match amounts with code "8" and zero as taxable amount?

You indicate, Gary, that the remaining SIMPLE assets can be rolled to an IRA and then into the 401(k) plan (it does accept rollovers). Is there a reason why they can't be directly rolled to the 401(k) plan, assuming the 2-year rule is satisfied?

The devil is in the details and there seem to be a lot of details to take care of in undoing this January contribution. I appreciate any guidance you can give me.

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If I understand correctly, the 2005 W-2's can be fixed by adding the January deferrals to taxable income and withholding taxes on those amounts.

Yes, but the matching contributions are also treated as income.

The January deferrals + earning must then be withdrawn, but the holder of the assets (Vanguard in my case) will issue a 1099-R. Can they use code "8" and show zero as taxable amount?

They will generally do what they do. It would be helpful to include any notice the employer provides to the trustee or custodian. The employee can explain that the amount (but not gain) was included in income per the W-2 (if it is reported as taxable). If reported as subject to penalty, that too can be explained away.

What happens to the match? Can that be returned to the employer with earnings? If so, should 1099-R's be issued to participants for the match amounts with code "8" and zero as taxable amount?

It belongs to the participant now. No returning to employer. If the employer's letter clearly states that the amount was included on the W-2 the trustee may (or may not) code it as "not determined" (box 2B)).

You indicate, Gary, that the remaining SIMPLE assets can be rolled to an IRA and then into the 401(k) plan (it does accept rollovers). Is there a reason why they can't be directly rolled to the 401(k) plan, assuming the 2-year rule is satisfied? The devil is in the details and there seem to be a lot of details to take care of in undoing this January contribution. I appreciate any guidance you can give me.

Well, as things evolved, SIMPLE IRAs don't become traditional IRAs after two years. Rollovers from SIMPLE IRAs to a QP/403(b)/457(f)--but NOT a SIMPLE 401(k)--are permitted after 2 years. Within the two year period, the SIMPLE IRA can only be transferred into another SIMPLE IRA (see 408(d)(3)(H), as amended by EGTRRA).

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