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Termination of SIMPLE IRA


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Lately, I've been struggling with the two-year rule for SIMPLE IRA rollovers (i.e., the prohibition on rolling over amounts in a SIMPLE IRA to a plan other than a SIMPLE IRA within the first two years). Is anyone aware of any waiver of this rule where the SIMPLE IRA is terminating because the employer is disolving? For employees who are younger than 59 1/2, this rule kicks the early distribution penalty up to 25%. These employees end up losing a quarter of their accounts in a forced distribution, because the plan had to be terminated based on a dissolution they had no control over. This doesn't seem fair, but I can't find anything that would alter the result. Any thoughts?

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The two-year rule is set in stone. The 25% penalty does not apply on account of plan termination. It may apply to distributions from the SIMPLE IRA, unless an exception applies. The trustee/custodian should also be informed of the termination and that they are to accept no further contributions. Hope this helps.

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Gary, thanks for your reply. I agree that the 25% penalty technically stems from the distribution rather than the termination, but doesn't termination of a plan require distribution of all the plan's assets?

No. This is unlike qualified plans and 403(b)s where the assets are required to be distributed when terminated. Under a SIMPLE IRA, the assets can remain in the participant’s account after termination.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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  • 2 months later...
  • 7 years later...

The two-year rule begins on the date of the first deposit into the SIMPLE and includes deposits made within that two year period. Correct?

I have a company that has a SIMPLE IRA. They purchased another company that sponsored a 401(k). They are terminating the SIMPLE plan and continuing the 401(k). If everyone with a balance in the SIMPLE plan first got deposits back in say 2007 then each year through 2015. I am not violating the above rule by rolling into the 401(k) qualified plan? Correct?

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  • 1 month later...

KimBoyd, welcom to the Boards.

1. The two-year rule for purposes of determining whether a distribution from a Simple IRA is subject to the 25% tax begins on the date the first elective contribution was made into that Simple IRA Account. Subsequent deposits are irrelevant. IRC 72(t)(6). In your case, no problems on this score, but....

2. Terminating the SIMPLE IRA during 2016 may be problematical (if that was intended, not clear from your inquiry above). If the Simple plan was not properly terminated for 2016, it can not terminate until 2017 and only if notice is given to employees before November 2, 2016 (see example). Special rules apply to acquisitions and other similar transactions. See Code Section 408(p)(10) for the Simple and 410(b)(6)(Cee) for the 401(k).

Thus, the exclusive plan requirement under 408(p)(2)(D) is NOT treated as violated. And the Simple plan needs to continue (at least) until year end (2015 or 2016, depending upon the date notice was given).

In other words, including the same employees in both plans in 2016 may not be a very good idea unless the Simple plan was timely terminated (e.g., on or before November 2, 2015) for 2016.

Example: Acme Company decided on November 18, 2015, to terminate its SIMPLE IRA plan as soon as possible. The earliest effective date for the termination is January 1, 2017. Acme must notify its employees before November 2, 2016, that it won’t sponsor a SIMPLE IRA plan for 2017.

Hope this helps.

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  • 10 months later...

I have been researching the treatment of plan assets upon termination of a SIMPLE IRA.  Although I agree that the "plan assets" are already in participants' IRAs, and it makes sense that  distribution of plan assets upon termination of the plan would be unnecessary, I am not able to find guidance to this effect.  Does anyone have IRS guidance that states that plan assets do not need to be distributed when the SIMPLE IRA plan is terminated?

 

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I had to look up what tautology meant, but now that I know, I also agree with Mike.  The point is, there are no PLAN ASSETS.  The employees already have the money.

FYI:  "the saying of the same thing twice in different words, generally considered to be a fault of style"

Austin Powers, CPA, QPA, ERPA

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  • 4 years later...
On 4/19/2016 at 1:12 PM, Gary Lesser said:

KimBoyd, welcom to the Boards.

1. The two-year rule for purposes of determining whether a distribution from a Simple IRA is subject to the 25% tax begins on the date the first elective contribution was made into that Simple IRA Account. Subsequent deposits are irrelevant. IRC 72(t)(6). In your case, no problems on this score, but....

2. Terminating the SIMPLE IRA during 2016 may be problematical (if that was intended, not clear from your inquiry above). If the Simple plan was not properly terminated for 2016, it can not terminate until 2017 and only if notice is given to employees before November 2, 2016 (see example). Special rules apply to acquisitions and other similar transactions. See Code Section 408(p)(10) for the Simple and 410(b)(6)(Cee) for the 401(k).

Thus, the exclusive plan requirement under 408(p)(2)(D) is NOT treated as violated. And the Simple plan needs to continue (at least) until year end (2015 or 2016, depending upon the date notice was given).

In other words, including the same employees in both plans in 2016 may not be a very good idea unless the Simple plan was timely terminated (e.g., on or before November 2, 2015) for 2016.

Example: Acme Company decided on November 18, 2015, to terminate its SIMPLE IRA plan as soon as possible. The earliest effective date for the termination is January 1, 2017. Acme must notify its employees before November 2, 2016, that it won’t sponsor a SIMPLE IRA plan for 2017.

Hope this helps.

Gary Lesser,

I've been looking into the rules concerning the discontinuance of SIMPLE IRA contributions as they apply in an acquisition. In the situation I am reviewing, a 401(k) plan sponsor ("KSCO") will acquire another company ("ACQCO") in a stock acquisition effective 12/31/2021. ACQCO will cease to exist, and the former employees of ACQCO will be hired by KSCO effective 1/1/2022.  KSCO is intending to cover the former ACQCO employees in its 401(k) plan  effective 1/1/2022, and is planning on notifying those employees of that along with the fact that no 2022 contributions will be made to the SIMPLE IRA sponsored by ACQCO. I think this is fine and does not run afoul of SIMPLE IRA or 401(k) plan rules, but reading your Acme Company example gave me pause. Can’t the ACQCO SIMPLE IRA be terminated 12/31/2021 in this situation?

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1 hour ago, BadgerDon said:

ACQCO will cease to exist

I'm not Gary Lesser but his example was for an ongoing company.  If a company doesn't exist and has no employees it can't very well sponsor a plan even if it wants to.  (Of course if it doesn't exist it has no thoughts/wants but I digress.)  I'm cautious about applying logic to retirement plans but here logic triumphs.  You can give a courtesy notice ("because we don't exist we won't continue to sponsor the plan") but I don't see any problems with notice requirements.

Ed Snyder

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