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Replacing SIMPLE with 401(k) Plan Mid-Year After Correcting SIMPLE Employer Eligibility Failure

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Notwithstanding the general rule that you can't terminate a SIMPLE and replace it with a 401(k) plan mid-year, if the employer has become ineligible to maintain a SIMPLE and is beyond the grace period and they correct under VCP by stopping any further contributions in the middle of this year, can they start a 401(k) plan for the rest of this year?  Or do they have to wait to start the 401(k) until next year?  It seems that, given that they can't continue the SIMPLE for the rest of this year, they should be able to start the 401(k) plan, but EPCRS says that a SIMPLE plan that is corrected for an employer eligibility failure through VCP "is treated as subject to all the requirements and provisions of ... 408(p)," which could mean having another qualified plan is prohibited for the rest of the year.

A TPA is suggesting that the employer would need to wait until the next year, so I was curious what others on this forum thought about this.    

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It's not so much that the 401(k) has a problem; the SIMPLE is invalidated when you start a 401(k) in the same year.  So, you had a SIMPLE for an ineligible employer, and the fix is simply to stop contributions.  Nothing apparently is wrong with the SIMPLE contributions made to date.  Then, you start a 401(k) and the SIMPLE contributions are invalidated.

I've heard is suggested that the SIMPLE contributions would now be considered regular IRA contributions, subject to regular IRA deductibility rules.  Whether all that is worth it is the question; I'd generally lean towards keeping things "simple" but others might feel differently.

I think if you search the boards you'll find prior discussions.



Ed Snyder

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If you've corrected the employer SIMPLE IRA eligibility failure by stopping contributions and making the required VCP filing then I believe there's no problem establishing the 401(k) effective for 2019 so long as you take into account the SIMPLE deferrals in your 402(g) testing.

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