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SIMPLE and Profit Sharing


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Suppose you have a company with a 6/30/11 year end that adopts a profit sharing plan for the 7/1/10 - 6/30/11 year. Suppose they also have maintained and funded a SIMPLE through 12/31/2010.

1. If eligible employees were not provided a notice for the SIMPLE for the 2010 calendar year, does that mean they had an invalid SIMPLE for 2010?

2. Since they cannot have any plan besides the SIMPLE, I would think they could not make any profit sharing contribution for the 7/1/10 - 6/30/11 year, correct?

3. Had they funded the SIMPLE at all in 2011, they would not have even been able to make a profit sharing contribution for the 7/1/11 - 6/30/12 year.

Thanks a million.

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Answers to your questions:

1) Not really. Depending on whether the failure to provide the notice is significant, you may correct under SCP. You may also file for a $250 VCP correction with the IRS to add a little comfort.

2) True. This standard applies for plans beginning and ending in the calendar year where a SIMPLE IRA is funded.

3) True. Since the plan year began in 2011.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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2. Since they cannot have any plan besides the SIMPLE, I would think they could not make any profit sharing contribution for the 7/1/10 - 6/30/11 year, correct?

3. Had they funded the SIMPLE at all in 2011, they would not have even been able to make a profit sharing contribution for the 7/1/11 - 6/30/12 year.

I think it's the other way around; making profit sharing contributions invalidates the SIMPLE contributions. A requirement of a SIMPLE plan is that you don't maintain another plan during the calendar year of the SIMPLE. (It's not a requirement of the PS plan that you don't have a SIMPLE.)

Ed Snyder

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Thanks for the answers.

If a profit sharing contribution were made and the SIMPLE is considered invalid, would that mean that any salary deferrals and match contributions are considered salary for that calendar year?

Also, since 2010 has gone by, I would think the 6% excise tax would apply to those SIMPLE contributions since they would not have been withdrawn by December 31, 2010.

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I think it means that any SIMPLE contributions are excess contributions and must be withdrawn. I'm not sure if that means re-doing W-2s or what; it always seemed so ugly that I recommended avoiding it completely and just starting the PS later.

Ed Snyder

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It will mean filing with the IRS when the SIMPLE fails. Some companies intentionally fail the SIMPLE IRA when it no longer serves their needs. However, they do it with the mistaken impression that they won't need the $250 filing with the IRS. There may be arguments to the contrary, but I'd never fail one without that IRS filing.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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See http://www.irs.gov/pub/irs-tege/simple_fixit_guide.pdf

Starts on page 12 and mentions the $250 filing fee.

If the SIMPLE is so "simple" that only one overlapping year exists and suppose that year has only a few hundred dollars of contributions in that overlapping year, you may consider whether or not it makes any cost-benefit sense to actually pay the $250 for the filing. It may be more cost-effective in that case to just remove the small ineligible contributions from the IRAs, including earnings on those ineligible amounts, report on Form 1099-R, and pay the excise tax on those ineligible contributions on Form 5330.

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