Converting a SIMPLE to a Safe Harbor 401(k) Plan

[Guest Joe Vasko]

I have client with a SIMPLE Plan, but wishes to convert to a Safe Harbor 401(k) Plan as soon as possible. No deferrals in the SIMPLE Plan have been made for 2002.

Can you retroactively convert the Plan to a Safe Harbor 401(k) Plan effective January 1, 2002? Is there still a 30 day notice requirement? If 3% nonelective contribution will be used, would compensation be considered for the full year?

Thanks,

Joe

[Gary Lesser]

Simple contributions (match on elective and nonelective) are based on compensation for the entire year. Generally, a 401(k) Simple can be amended, but the amendment is not effective until the first day of the CY following the date of adoption. See Rev Proc 97-9.

[Guest Joe Vasko]

Gary,

Would it be possible to just establish a Seperate 401(k) Safe Harbor Plan, terminate the 401(k) Simple Plan (which no contributions have been made to for 2002) and roll over the balances to the 401(k) Safe Harbor Plan.

Thanks,

Joe

[Gary Lesser]

The model amendment set forth in Revenue Procedure 97-9 [1997-1 CB 624] contains a model revocation clause that permits employers to revoke the 401(k) SIMPLE provisions without terminating the plan. The revocation clause should be executed only if the employer wants to revert to the plan provisions that apply in the absence of the 401(k) SIMPLE provisions under the model revocation clause. Any such revocation is effective as of the first day of the calendar year following the date revocation is adopted. It would be far less expensive to amend the existing plan, Rather than terminating it and transferring the assets to a new plan.