SIMPLE Exclusive Plan Rule

[Guest Thornton]

Company A has had a SIMPLE IRA for a number of years. Deferrals for January and February of 2007 have been deposited. The company now wants to establish a 401(k) plan for 2007. The way I read the commentary, there are two options:

1) Don't do it!

2) Freeze the SIMPLE and establish the 401(k). The SIMPLE is now invalidated for 2007. It looks like there are three correction methods:

-Reurn the 2007 deferrals to plan participants by the due date of the employees' tax return, pursuant

to IRC section 408(d)(4). While there is no guidance, it looks like the 25% the 6% excess

funding penalties do not apply. I don't think that Form 1099 has a box for this. Does anyone know? Is

the failure insignificant as required for self-correction?

-For the weak-hearted, request relief from the IRS by filing under EPCRS. As I read EPCRS, there are

two approaches.

a) The filing can be done as an employer eligibility failure, which, if approved by the IRS, would

treat contributions already submitted for 2007 as contributed to a proper SIMPLE. Since the

violation would not be "accidential", I probably would not recommend this approach. Any

thoughts?

b) File to correct as the contribution of excess amounts under section 6.10 of EPCRS.

Am I making any sense? Has anyone done any of the above? Thanks.

[Guest Thornton]

As a follow up question: Has anyone heard about requesting IRS approval of a recharacterization of the SIMPLE contributions for 2007 as contributions to the new 401(k) plan? I've been told that this has been done, but I can't find anything on it.