Discontinuing SIMPLE IRA

[austin3515]

How do you discontinue a SIMPLE IRA as of the end of a calendar year? Client is starting a 401k with us 1/1/2012.

[Guest jims]

Since SIMPLE must run for a calendar year and there is a 60 day election period before each year, you need to inform the employees before the 60 days that there will be no plan in 2012. You may want to coordinate with announcing 401(k) so they at least know they have continued opportunity to save for retirement.

[John Feldt ERPA CPC QPA]

Why wait? The adoption of a qualified plan only invalidates the SIMPLE for the year. Okay, I guess that could make you wait.

The fix is here (#2 in this list at this link) if it happens. See the corrective action section too, under the "more" link. It might not be all that costly, depending on the circumstances.

http://www.irs.gov/retirement/article/0,,id=241051,00.html

Otherwise, as mentioned, give the 60 day notice and that ends it.

[austin3515]

Hmmm... So you "accidentally" set up a neew plan and all you do is suspend contributions to the SIMPLE? Seems too good to be true. Also, in my situation it wouldn't be so much a mistake as a deliberate course of action. We'll start up on 1/1/2012

[John Feldt ERPA CPC QPA]

Well, if you click on the "more" link and read the section the IRS has for how to fix it, it's more than just suspending the contributions, unless (I'm guessing) no contributions had occurred for the overlapping year.

Here's a section of the IRS text:

How to Fix the Mistake:

Corrective Action:If you maintain other retirement plans, cease making new contributions to the SIMPLE IRA plan. You may be able to file a VCP application requesting that contributions made for previous years in which you maintained more than one plan remain in the employees’ IRAs. Salary deferral contributions (and related earnings) should be returned to the employees. The returned amounts should be reported on Form 1099-R as a taxable distribution not eligible for rollover. Employer contributions (and related earnings) should be returned to you and reported on a Form 1099-R issued to the participant indicating the taxable amount as zero. In addition, any contributions made to the SIMPLE IRA are excess contributions subject to excise tax. For each year there are excess contributions in the SIMPLE IRA plan, you, the employer, are subject to excise tax under Code §4972, and are required to file a Form 5330 excise tax return. In addition, for each year that excess contributions are made to a participant’s SIMPLE IRA, the affected participant may be liable for excise tax under Code §4973 and may be required to file a Form 5329. The excise tax liabilities occur for each year until the excess contributions are removed from the SIMPLE IRA plan.

Correction Program(s) Available:

Self-Correction Program:This mistake cannot be corrected under SCP.

Voluntary Correction Program:You make a VCP submission to the IRS pursuant to Rev. Proc. 2008-50 identifying the mistake. The fee for the VCP submission is $250.

Audit Closing Agreement Program:If this mistake is discovered on audit, it may be corrected under Audit CAP. Correction of the plan under Audit CAP should be very similar to correction under VCP. The sanction under Audit CAP is a percentage of the maximum payment amount.

[austin3515]

Gotcha. I didn't bother clicking the link, because I knew enough to avoid the mistake

Thanks for the info though!! The IRS does have some gems on its web-site. This page is definitely one of them!

[shERPA]

A variation on this theme.

SIMPLE IRA plan sponsor is considering a 401(k) for 2012, they will probably get it going in the 2nd quarter of 2012 just because they have a lot of other things going on to deal with first. So they have notified ees there will be no SIMPLE for next year and the (k) should be starting.

They have asked me if for some reason they decide next year not to go thru with the 401(k), can they restart or set up a new SIMPLE IRA for 2012?