Revocation of SIMPLE 401(k)

[nancy]

I have a SIMPLE 401(k) plan on a standardized prototype document. The current document provisions state that non-elective contributions are not allowed. Could the employer revoke his SIMPLE election prior to 12/31, subject the plan to 401(k) testing and make a non-election contribution under any allocation form he chooses? The plan would be amended to provide for an age weighted or integrated allocation? It would seem that since non-elective contributions were not allowed, this would prevent any problems with anti-cutback because of the 500 hour/last day rule.

[Mike Preston]

Seems perfectly reasonable to me.

[Gary Lesser]

There may be a problem if the amendment is effective prior to the first day of the following year (see Rev Proc 97-9). In the absence of well-established guidance, the position of the IRS regarding excess contributions to a SIMPLE 401(k) plan is, at best, unclear. Several possibilities exist, some of which offer solutions:

1. The plan becomes a traditional 401(k) plan and is taken out of the realm of a SIMPLE 401(k). In the authors' opinion, this is an unlikely choice because of the information provided to the participant by the plan regarding the manner in which the plan would operate for that plan year.

2. The plan becomes a “bad” SIMPLE plan or a plan with a “bad” contribution allocation. Correction should be made under the EPCRS.

3. It may be possible to correct the excess contribution if plan contributions are the result of a mistake of fact. [ERISA § 403©(2)(A)] In the authors' opinion, this option is least likely; furthermore, the IRS has not included excess SIMPLE contributions as a clear mistake of fact.

4. It may be possible to correct the excess contribution (in accordance with plan provisions) if plan contributions are conditioned on their deductibility and the deduction for the contributions is subsequently denied. [ERISA §§ 403©(2)©, 4972©(2)]

In May 1999 the IRS informally agreed with propositions 2 and 4 above. [General Information Letter issued to Gary S. Lesser, May 18, 1999; see also Rev Rul 91-4, 1991-1 CB 57.]

Practice Pointer. Practitioners should proceed with caution when dealing with excess contributions to a 401(k) SIMPLE plan until further guidance is provided by the IRS.