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Simple IRA to 401(K)


Guest JDK
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I have an employer who wants to switch from a simple IRA to a 401(K). What are the necessary steps in accomplishing this switch. I understand that if the simple has started the calendar year you cannot have a qualified plan during that year. Would the employer be able to start the 401(K) as of 1/1/07?

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The 401(k) would invalidate any previosly established SIMPLE IRA for the year. All contributions (now excess contributions) would be reflected in box 1 of Form W-2. The excess should be removed in accordance with traditional IRA rules. [see IRC 408(d)(7)(B), referring to 408(d)(4) and 408(d)(5)], However, the SIMPLE IRA excess does not appear to be subject to the 6 percent excess contribution penalty tax (even if returned after the due date).

Hope this helps.

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  • 4 weeks later...
Guest Shelley
The 401(k) would invalidate any previosly established SIMPLE IRA for the year. All contributions (now excess contributions) would be reflected in box 1 of Form W-2. The excess should be removed in accordance with traditional IRA rules. [see IRC 408(d)(7)(B), referring to 408(d)(4) and 408(d)(5)], However, the SIMPLE IRA excess does not appear to be subject to the 6 percent excess contribution penalty tax (even if returned after the due date).

Hope this helps.

Additional Question regarding Simple IRA exclusive plan rule...

Employer A sponsors a 401k plan and purchased 100% of the stock of corproation B in 2006. Corporation B sponsors a Simple IRA for it's 4-5 employees. For purposes of the exclusive plan rule, if $0 contributions have been made to the Corporation B's Simple IRA in 2006. Corporation A wishes to terminate the Simple IRA in 2006 and amend Corporation A's 401k plan to include employees of Corportion B as eligible participants in Corporation A's 401k plan during the 2006 plan year, correct? The affect to the Simple IRA in 2006 would be moot since there are $0 "excess contributions" to return, correct?

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  • 3 weeks later...
I have an employer who wants to switch from a simple IRA to a 401(K). What are the necessary steps in accomplishing this switch. I understand that if the simple has started the calendar year you cannot have a qualified plan during that year. Would the employer be able to start the 401(K) as of 1/1/07?

Yes, it would be best to start the 401(k) plan on January 1, 2007 and discontinue the SIMPLE IRA as of December 31, 2006.

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Additional Question regarding Simple IRA exclusive plan rule...

Employer A sponsors a 401k plan and purchased 100% of the stock of corproation B in 2006. Corporation B sponsors a Simple IRA for it's 4-5 employees. For purposes of the exclusive plan rule, if $0 contributions have been made to the Corporation B's Simple IRA in 2006. Corporation A wishes to terminate the Simple IRA in 2006 and amend Corporation A's 401k plan to include employees of Corportion B as eligible participants in Corporation A's 401k plan during the 2006 plan year, correct? The affect to the Simple IRA in 2006 would be moot since there are $0 "excess contributions" to return, correct?

You are correct. In the event there were contributions to the SIMPLE, then there is a transition rule in place to allow those two plans to continue without violating the exclusive plan rule. But like you said, it's a moot point.

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