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Simple to 401k Invalidation Question


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Guest Grumbles

I have a question that has been talked around, but not exactly about. In our situation, the company wants to get rid of their Simple Plan and setup a 401k (making room for the possibility of an ESOP). The company has not contributed anything for 2008, but there is a possibility that employees have. If the company sets up the 401(k) in 2008, the Simple will be invalidated any all contributions will be considered excess (but, since nothing has been contributed by the employer this is not an issue). What happens if there has been employee contributions? Also, does this get around any notice and timing requirements that normally apply for a Simple termination? Are their any other concerns that I ought to be considering?

Thanks for any help & any citations would be greatly appriciated.

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Guest Grumbles
Explain how you can set up a 401(k) plan that makes any sense at this point.

The goal is to invalidate the Simple to make way for the ESOP; the two can't co-exist. At this point, the 401(k) is more of a nuclear option to clear the SIMPLE out of the way to make room for the ESOP and allowing for the 401(k) for next year. There is no particular goal for the 401(k) for 2008, but the concern is trying to get the ESOP formed in 2008.

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Unless contributions were made for 2008 to this new plan, the Simple IRA would not be invalidated. Is it really necessary for this to happen in 2008 (and create a mess for everyone)? Why can't the new plan be made effective in 2009 even if put in place before year end?

The elective contributions are treated as employer contributions for some purposes, including the 10% (cummulative) tax on nondeductible contributions.

If the plan is invalidated as a matter of law, the excesses will have to be dealt with. Generally, the employor would include amounts on W-2, notify employees of what happened; and notify the trustee that the plan has been terminated (by operation of law). If otherwise termininated, the termination cannot be any earlier than next year, and the trustee notified (after any required employer contributions). To avoid penalties (6% cummulative), any excesses in the Simple-IRA's needs to be corrected by the owner(s) (generally) on or before the due date of the employee's tax return.

Hope this helps.

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