Timing of replacing a SIMPLE IRA with a qualified plan

[Guest GARNETT]

Company X currently sponsors a SIMPLE IRA for its eligible employees. Company X has a fiscal tax year which begins on October 1 and ends on September 30. I know that Company X cannot maintain a qualified plan at the same time it maintains a SIMPLE IRA without violating the SIMPLE IRA's exclusive plan requirement. However, can Company X implement a qualified plan on October 1, 2000 (the first day of its 2000-2001 fiscal year) even though it maintained a SIMPLE IRA (to which contributions were made) during the 2000 calendar year? Put differently, if Company X terminates its SIMPLE IRA before October 1, 2000, may it then implement a qualified plan effective October 1, 2000, without violating the SIMPLE IRA's exclusive plan requirement even though it did sponsor a SIMPLE IRA between January 1, 2000, and September 30, 2000?

The Code states that the relevant measurement period for purposes of applying the exclusive plan requirement is the calendar year (see Code § 408(p)(6)©), but does anyone know whether the IRS permits the rule to be applied based on the plan sponsor's fiscal year in lieu of the calendar year?

[Guest FredReilly]

I think the only guidance is in Notice 98-4. Q & A B-3 only discusses the issue in terms of a calendar year. So if a plan is in existence and a contribution allocated for any plan year which begins or ends within the calendar year in question it seems as though the SIMPLE is "disqualified".

I would think the only solution would be to have a short first plan year from January 1, 2001 to September 30, 2001. That is, unless you want to intentionally disqualify the SIMPLE and deal with the IRA withdrawals. I have run into this situation and the custodians seem to be adamant in coding the distributions as premature withdrawals and subjecting them to the 25% penalty. If you take a look at a few of the prior postings in the category it seems to be the opinion that they would be excess contributions and therefore not subject to the 72(t) tax. I would be careful to make sure that the IRA custodian agrees to that before you proceed.

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[Gary Lesser]

If benefits are accrued or contributions are made to a qualified plan during any part of the SIMPLE IRA year (always a CY) then the SIMPLE becomes a "complex". Thus, a short PY (within the CY) will not work. [iRC 408(p)(2)(D)] The only exception is if the employees under the SIMPLE are not eligible to participate in the qualified plan because of IRC 410(B)(3).