Jump to content

Terminate a SIMPLE Plan


Guest MELODY LOVE
 Share

Recommended Posts

Guest MELODY LOVE

How is a SIMPLE-IRA plan terminated? What if it was not properly funded in the past and there have been no contributions for the past year or two? The employer set up a profit sharing plan for 2000 and did not contribute to SIMPLE. It is the employer's intent to make a profit sharing contribution for 2000. Any issues with that?

Link to comment
Share on other sites

I think the way to terminate is to announce cessation of match and employee deferrals. But you must match for deferrals made until cessation. SIMPLE plans require an employer contribution. The employees could enforce this requirement along with the IRS. And who has made no contributions for past two or three years - employer or employee? If there are no employee contributions during 2000 then I think you do not have a SIMPLE plan and you could have a profit-sharing plan. But, I believe, all issues are controlled by whether or not employees deferred and when.

Link to comment
Share on other sites

Guest MELODY LOVE

No one at all made any deferrals during 2000. The honest truth before that is not all of the employees were informed and mainly highly compensated employees were using the plan. This was only deferrals and no employer contributions. Unfortunately, the client only gives us sketchy details after we set up the profit sharing plan. If the poorly handled SIMPLE plan has no effect on the current profit sharing plan, then my preference would be for the client to obtain some legal advice to solve the problem. ???

Link to comment
Share on other sites

There is no official notification required to terminate a SIMPLE IRA plan. The employer, out of courtesy, should notify the employees.

Remember that in order for a SIMPLE IRA to be maintained each year, the employer must give employees a sixty-day notification. For example, if the plan were established by October 1, 2000 for the 2000 tax year, the employer would be required to give the employees the sixty-day notification, starting the day the plan was adopted.

if the employer intended to continue with the plan for year 2001, then the employer would be required to give the employees another notification, on or before November 1, 2000. Employees would have from this date through December 31, to decide is they wanted to participate in the SIMPLE. This notification must be provided by Every November 1, if the employer intends to continue with the plan for the next year. If no notification is given, then it means that the plan will not be maintained the next year, and the employer would be allowed to maintain another type of plan.

Regarding the two years that the plan was not funded, if these notices were not provided, then you may not have an issue. However, is they were- we need to look at a few things at least.

1. Melody , if the employees made deferral contributions, the employer would be required to make employer matching contributions, if the employer elected the matching contribution election

2. If the employer chose the non-elective contribution election, then a contribution should have been made for all eligible employees.

3. If no notification was provided by the employer, then the SIMPLE was not in effect, and no deferrals should have been made. If any deferrals were made, or any other contribution, then these contributions are deemed excess contributions.

Finally, as with any issue that involve retirement plan or coul have tax implications, clients should consult a certified -compent tax advisor

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

Link to comment
Share on other sites

  • 5 months later...

Applyby-

I like your response, but I'm still not entirely convinced. The problem is that you have an effective salary reduction agreement in place. I don't believe that agreement goes away just because the employer fails to provide the notice. (Keep in mind that for employees with salary reduction agreements in place, the notice allows thems to modify their existing agreement- not just enter into a new agreement.) It could be argued by employees that the agreement remains in place, and the employer's obligation to match (or provide a nonelective contribution) also remains in place until the employer takes some official action to terminate the plan or the deferral agreements. This raises some issues regarding the nature of these additional contributions if the notice provisions are not satisfied- is this still a SIMPLE IRA account as defined in 408(p)?

Also, note that Code section 6693©(1) provides for a penalty tax of $50 per day for failure to provide the notice on a timely basis. This could also provide some support for the argument that failure to provide the notice does not result in automatic termination of the plan.

Just some thoughts- I haven't really researched this in any detail...

card

Link to comment
Share on other sites

Some additional information from the ASPA's 2000 Q&A's with the IRS:

Q. If a company has a SIMPLE IRA and adopts a qualified plan, what happens? Does the SIMPLE become invalidated since it can be the only plan of the sponsor? Would the contributions made this year have to be returned? If so when? By the due date of the employee's tax return? Would the distributions be subject to the 25% early distribution penalty since the SIMPLE has only been in place one year?

A. The SIMPLE is invalidated. The contributions would have to be returned by the due date of the employees' tax return (see 408(d)(4)). The 25% penalty would not apply.

card

Link to comment
Share on other sites

  • 11 months later...

Just looked into this and found the following from the 1999 ASPA IRS Q&As

2. Q. When can you terminate a SIMPLE IRA? Rumor has it that once you are passed the notification date, the employer must maintain the arrangement for the next entire calendar year.

A. It is either the notification date or the beginning of the next plan year. Though there is no official determination at this time, the conservative approach would be to use the notification date as the limit for termination.

Link to comment
Share on other sites

Bad notice, bad plan for year. No contributions, no plan for year.

A formal termination of the plan is an amendment. A SIMPLE-IRA plan can be amended during the year. The amendment must be made effective as of the beginning of the CY, BUT must conform to the plan notice for the CY. Even if contributions were made and matched properly, the failure to provide adequate plan notice to employees would have turned all contributions for year into excesses (and the SIMPLE into a COMPLEX).

Here, assuming no problems exist with regard to earlier years (before 2000), I see no reason why the employer could not make a 2000 P/S contribution (if under extension on the date the contribuion is made). It does not appear that the SIMPLE was ever implemented.

Arguably, the adoption of the P/S plan (with an intention to make contributions) would be reasonable cause under Code Section 6693©(3) to abate the penalty for not providing the plan notices.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...