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terminating Simple IRA


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Employer maintains a Simple IRA for 2015.

Effective 3/1/2015 the employer will be acquired by Company B. Company B maintains a 401(k) Plan.

Employer has not "ownership" in Company B.

Can Company B terminated the Simple IRA effective 3/1/2015 and begin participating in Company B's 401(k) Plan?

if so, the contributions made to the Simple IRA are counted towards the 402(g) limit, correct.

Thanks

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Short answers:

Q1. Can the Simple IRA be terminated 3/1/2015 and EEs begin participating in the 401(k) Plan?

A1. Not without consequences to the amounts already contributed to the SIMPLE for 2015.

Q2. If so, the contributions made to the Simple IRA are counted towards the 402(g) limit, correct?

A2. No. Contributions to an IRA are not used to offset the 402(g) limit.

Longer responses:

For a SIMPLE, there is a transition period, much like 410(b)(6)(c ), but it's a year longer, described under Internal Revenue Code Section 408(p)(10)(C ).

If the Employer maintaining the SIMPLE plan satisfies the conditions required, they can continue to maintain the SIMPLE IRA during the transition period, even if the company stock sale means the Employer now also maintains a 401(k) plan.

Conditions:

1.The Employer with the SIMPLE IRA must not change the coverage of the SIMPLE plan significantly, other than employee turnover related to the stock sale, if any.

2.The Employer with the SIMPLE IRA cannot also adopt another qualified plan (other than becoming the sponsor of a qualified plan due to the transaction to buy the stock of an employer that maintains a qualified plan)

The transition period starts on the date of the business transaction and ends on the last day of the second calendar year following the end of calendar year in which the transaction occurs.

Example 1:

Company A maintains a SIMPLE IRA and no other plan. Company B maintains a 401(k) plan. Company A buy 100% of the stock of Company B on March 1, 2015, thus Company A now sponsors both a SIMPLE IRA and due to its ownership now of company B, it also maintains a 401(k) plan. The transition period begins March 1, 2015. The transition period can extend as long as December 31, 2017 (the end of the 2nd year following the year the transaction occurred.

Example 2:

Assume the same facts as example 1, but assume Company A adopts the 401(k) plan as a participating employer on July 1, 2015 and allows its employees to participate in the 401(k) plan starting July 1, 2015. In this example, the transition period begins March 1, 2015 but ends on June 30, 2015 due to the change in coverage. All contributions made to the SIMPLE for 2015 are now invalidated and must be returned by April 15, 2016, although the 25% penalty on the return of such contributions would not likely apply, and/or relief under Revenue Procedure 2013-12 can be sought.

Example 3:

Assume the same facts as example 2, but assume Company A ends the SIMPLE plan effective December 31, 2015 and adopts the 401(k) plan as a participating employer on January 1, 2016, allowing its employees to participate in the 401(k) plan on January 1, 2016. In this example, the transition period begins March 1, 2015 but ends on December 31, 2015 due to the change in coverage. Any contributions made to the SIMPLE for periods after December 31, 2015 are not valid.

In example #2 above, the 25% penalty would not apply to any excess contributions made to a SIMPLE IRA for the year in which a qualified plan is established. This ONLY applies to the amounts contributed to the SIMPLE IRA for that year and only if such amounts were returned to the participant by the due date of their tax return for that year. Money deposited for a prior year does not meet this exception from the penalty tax and the usual 2-year rule still applies to determine if such tax applies to any distributions of the rest of the SIMPLE IRA accounts.

Remember, if a withdrawal is made from a participant’s SIMPLE IRA account within 2 years from the day contributions were first deposited to the participant’s account, the 2-year rule applies a 25% penalty (instead of 10%) to the withdrawal in addition to regular income taxes (even if the amount is rolled over to a regular IRA or a qualified plan).

But that also means the 25% penalty does not apply to anyone who is exempt from the regular 10% penalty, such as someone who is at least age 59½ at the time of the withdrawal, or who satisfies one of the exceptions under section 72(t). The SIMPLE-IRA withdrawal is reported by using code "S" on Form 1099-R to report premature distributions taken within the first two years.

When an qualified plan is established, the exclusive plan rule for the SIMPLE states that it's the SIMPLE plan that becomes invalid due to the presence of the qualified plan (or of another SIMPLE). Once the transition period ends, hopefully the employer has taken action so they only have one plan in place, otherwise the SIMPLE plan has an error. The IRS has a fixit guide for this at http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-Fix-It-Guide-Your-business-sponsors-another-qualified-plan

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