Terminating a SIMPLE.

[Guest Thornton]

Can a SIMPLE 401(k) be converted to a safe harbor 401(k) at any time during a plan year?

[Mike Preston]

I don't *know* the answer, as I haven't looked it up, but I would be very surprised if the answer is yes. One cannot go from regular 401k to SH 401k without giving the proper notice before the beginning of the plan year. One CAN go from a non-401k to a SH 401k after the beginning of a plan year, but only up through the 9th month of that plan year.

Could the rules have been structured so that a SIMPLE 401k is the same as a non-401k as far as the rules go? I doubt it.

You want to read 98-52 and then let us know what it says? (I think that is the cite that controls).

[Gary Lesser]

Several possibilities exist that deal with the resulting excess contributions, 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. [Rev Proc 2002-47].

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.