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Profit Sharing NOW SIMPLE IRA


Guest SPollock
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Guest SPollock

I have a client that presently have a Profit Sharing Plan. They would like to set-up a SIMPLE IRA plan. "MUST" they terminate the Profit Sharing plan before setting up the SIMPLE IRA or can they just not make any additional contributions to the P/S but keep it open? (They would be required to pay surrender charges on the P/S if they must terminate it.)

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Under a profit-sharing plan contributions can generally be discontinued without having to terminate the plan. If the discontinuance in a discretionary PS plan is just temorary there are generally no adverse affects, in other cases the plan may be deemed terminated (in whole or in part) and unvested amounts may become vested immediately. Problems generallt arise as to vesting after 2 years of little or no contributions. The pn has to be kept current and there are of course administration expenses.

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Guest David Dye

My initial thought was that you would need to terminate the PS plan, since you cannot have another plan in addition to a SIMPLE IRA plan.

After looking this up, I have learned that the ruling says that the employer cannot have maintained another qualified plan "under which contributions were made or benefits accrued for service during any year in which the SIMPLE IRA plan was in effect." Thus, as long as no further contributions are made to the PS plan, you can also have the SIMPLE IRA plan.

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David: What ruling is that? I thought I read somewhere (can't put my finger on it now) that the plan had to be terminated - in the sense that a resolution to terminate would have been adopted, but it was not necessary to have all of the assets paid out before establishing a SIMPLE plan.

Or maybe I just dreamed this up...?

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