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Client maintains both SIMPLE IRA and ESOP


nancy
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We currently have an ESOP client (bank holding company) that we just discovered also has a SIMPLE IRA. Both plans were established in 1999 and contributions allocated under both for 1999 and 2000. What happens in this situation? Are the SIMPLE contributions disqualified?

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The SIMPLE contributions are not eligible for tax benefits. The law is explicit, SIMPLE is the only plan allowed. My answer to "what now?" is, I believe, each of the employees must file an amended income tax return for 1999 reporting their deferrals. I believe that for 2000 they can withdraw their deferrals with no harm (and adjust the w-2's) to eliminate the deferral reduction. The match for both years is income to the participants and are reportable compensation for the appropriate year. And the SIMPLE IRAs may be subject to the 6% penalty for the 1999 deposits. What a mess. And, to my knowledge, there is no guidance so I could be all wet. Considering all the income tax issues (individual and company) and the cicumstances, I suggest you go see a lawyer ASAP.

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