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Is SIMPLE allowed if 100% refund of excess contribution occurs


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We have a multiple employer group 401(k) plan with a participating employer who will not pass the ADP test in 2012. There are 6 participants (2 HCE/4NHCEs) with only 1 HCE contributing in 2012 at this employer. Participating employer wants to terminate membership in this multiple employer plan, run a part-year ADP test, refund 100% of the excess contributions to the HCE during 2012 and set up a short year 2012 SIMPLE IRA.

My question is: Would this be permitted under the "exclusive plan" SIMPLE rule for calendar year 2012 with the idea that no benefits accrued under the 401(k) plan in 2012 since 100% was refunded as excess contribution?

Any thoughts?

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I wouldn't bet the ranch on it. Under 408(p)(2)(D)(i) the code refers to a "qualified plan with respect to which contributions were made...for service in any year in the period beginning with the year such arrangement [the SIMPLE] become effective..."

Seems like in your situation contributions were made, so if the SIMPLE were effective in 2012 it would run afoul of this.

I carry stuff uphill for others who get all the glory.

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