Jump to content

Freeze or Terminate 401(k), Start SIMPLE


Recommended Posts

It is my understanding that you can freeze a 401(k) and start a Simple. If we freeze as of 12/31/05, can the SIMPLE be started 1/1/06? What about notice requirements?

What if the 401(k) is terminated effective 12/31/05, but assets aren't distributed until 2006. Can we have a SIMPLE for 2006 in that case?

Thanks.

QPA, QKA

Link to comment
Share on other sites

Any of your scenarios are feasible. The SIMPLE-Ira can't coexist with an ACTIVE plan.

In either of your situations, the 401k will not be receiving contribution allocations in regard to its 2006 plan year, even though the plan continues to exist.

Regarding notice, in general, the employees get 60 days to make their contribution election when a SIMPLE-Ira is starting.

Link to comment
Share on other sites

  • 2 weeks later...
Guest stevena1

Just an FYI, I had this issue last year. A profit sharing plan was in place and had not received contributions in 6 years. The employer started a SIMPLE and started proceedings to terminate the profit sharing plan. The plan was audited, the IRS auditor said the SIMPLE was never a SIMPLE because it was not eligible to be set up becasue another plan was already "maintained". We tried to argue, but he said "maintained" did not mean that employees got contributions. They did get earnings, and statements, and therefore, according to the IRS, the plan was "maintained".

Link to comment
Share on other sites

Stevena1,

Someone erred, the profit-sharing plan was not maintained by the employer. The requirement that "contributions were made" or "benefits were accrued" was not met; therefore p/s plan was not maintained under the SIMPLE IRA exclusive plan rules. Perhaps a related employer maintained a plan(?).




			
		
Link to comment
Share on other sites

Guest stevena1

We argued just that point, they did not relent.

They said that earnings were allocated, forfeitures were reallocated in one of the years in between years with no activity, new participants were added to the plan and received statements (albeit with zero balances, but still...), therefore the plan was "maintained". Huge problem for the employer and it was a very costly audit for a very small plan.

No related employers, etc....this was a single employer, with just 10 employees.

I was suprised as well....

Link to comment
Share on other sites

forfeitures were reallocated in one of the years

Could this be the distinction?

Forfeitures are not the distinction, unless they replace otherwise required contributions. If I'm thinking right, required contributions will rarely (I hesitate to say never) be made with forfeiture money in a PSP. Notice 98-4, Q and A B-3. Also see IRC 408(P)(2)(D)(i) for more authoritative but a bit less definitive verbiage.

Link to comment
Share on other sites

Why didnt you challenge the IRS agent on his interpretation by demanding a letter citing the authority for his position? The IRS would have to respond with a letter which would have to be reviewed by an IRS attorney for compliance with the IRC?

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...