What does the word "maintain" really mean, rergarding a SIM

[Moe Howard]

I realize that:

An employer cannot have a SIMPLE plan, if the employer also currently "maintains" a SARSEP.

But, I'm not sure that I know what "maintains" means.

Here's my actual situation:

Years ago, an S-Corp established a SARSEP. It completely stopped using the SARSEP a couple of years ago and established a SIMPLE-IRA. It never took any formal steps to terminate the SARSEP (because a SARSEP is not a trust plan). All it did was set up SIMPLE-IRA accounts for each of its employees, started making SIMPLE contributions to those SIMPLE-IRA accounts and ignored the fact that the employees still have SARSEP-IRA accounts.

Now the S-Corp wants to switch back to the SARSEP. It wants to stop using the SIMPLE-IRA and start withholding SARSEP elective deferrals and making discretionary contributions to the SARSEP and do away with the SIMPLE-IRA. The reason why is...because the business is making a good profit now and it wants to take advantage of the $35,000 max contribution limits (allowed by SARSEP rules) .... rather than the measly max contribution allowed by its SIMPLE.

1. Since the SARSEP never died (terminated) .... can the corp begin using it again ?

2. What does "maintain" mean ? The corp never contributed to both the SARSEP and SIMPLE in the same year. Did it "maintain" a SIMPLE, while it also had an inactive SARSEP, because the SARSEP was still "available" for use ? Does "maintain" mean "available" ?

3. Can the corporation alternate (every other year) between the SIMPLE and SARSEP, as long as it maintains separate SIMPLE-IRA accounts and separate SARSEP-IRA accounts .... or is it now forced to continue with only the SIMPLE because it allowed the SARSEP to go inactive for a couple of years?

[Gary Lesser]

For this purpose, to maintain a plan which would invalidate (for that year) a SIMPLE-IRA means to accrue a benefit (in a DB for service in that year) or to receive a contribution in a dc plan (other than forfeiture) or a SEP/SARSEP.

Since the SARSEP was not terminated it would appear to remain grandfathered. There are no cites or information on this point. Getting a PLR would be prudent.

However, the SEP/SARSEP exclusion limit (IRC 402(h)) still limits nonreportable contributions to 15 percent (although 25% is deductable--but don't do it). If not integrated, $30,000 is the maximum SARSEP contribution ($200,000 x .15). The 415-$40,000 limit is also reduced under IRC 402(h) if the plan is integrated (but not lower than $35,160.70 ($40,000 less (.057 X $84,900)).