new 401k,but maintained SIMPLE

[Guest LTurner]

Our new client adopted a 401k PSP effective 4-1-02 with year end of 3-31. Did this last spring (2002)

Year progressed and CPA noted an excess contribution so called us to say that the SIMPLE deferral and 401k deferral for one employee exceeded the limit so an excess distibution needs to be done. This was discovered in February 2003.

This is how we now found out there was a SIMPLE maintained in 2002 for the first 3 months! Financial advisor told client you could end the SIMPLE on 3-31-02 and start a 401k on 4-1-02. SIMPLE was not disclosed to TPA.

What needs to be done, as you cannot both in the same year. Arguably, the FA wasn't thinking calendar year for SIMPLE - hence the effective date of new plan.

what should we do next?

[Gary Lesser]

The SIMPLE-IRA is "invalidated" [now a "Complex" !!]. All SIMPLE IRA contributions for 2002 are prohibited excess contributions.

See post "SIMPLE IRA: sole proprietor: return of contributions."

Unofficially, the 25% (within 2-year) penalty does not apply if corrected timely. [ASPA 2001 IRS Q&A #36, when employer adopted a QP].

Assuming contributions were made to the QP for 2002-2003, there isn't much that can be done. Include the simple excesses on Form W-2 box 1 (only) or as EI (if SE).

[Guest LTurner]

Gary,

let me make sure I interpreted this correctly,

we can correct the W-2s to reflect this, distribut the SIMPLE contributions for 2002 as excess, and we're done?

[Gary Lesser]

It would appear so. The employee would have to request the correcting distribution from the SIMPLE IRA. May I suggest that the employer prepare a letter of instruction that could then be use by the employee in convincing the trustee that the distribution is a return of an excess contribution (gain aside) and should be reported that way AND not subject to the 25% penalty.

[Guest LTurner]

Gary,

thanks

also, in your first reply you indicated 'now a "Complex"!!' - is this just your description of the situation or a classification/definition of something - as I haven't heard/seen this term before.

[Gary Lesser]

A "Complex" is my term for a bad SIMPLE-IRA. It's not in the Code, but should be. Thanks for your participation.