Simple plans

[Guest Joanne Davey]

I have a Client who has a Money Purchase plan. They recently established a Simple plan (recommended by their CPA). I told them that they cannot establish a simple plan in conjunction with another qualified plan. The question now is what do they do? My thought is that they need to terminate the Simple plan and distribute the deferrals made to it and report it as taxable income. Is there anything else I am missing? Are there any other ramifications?

Thanks

[Gary Lesser]

Assuming the MP plan was terminated in an earlier year or that there is no minimum funding obligation for the current year, a SIMPLE wd be allowed. In your case, it seems as though the SIMPLE has turned into a complex.

On Form W-2 include the excess in box 1 (do not include the excess in box 12). The excess amounts in the IRAs need to be removed timely by their owners to avoid penalties. Unfortunately, there are no excess contribution notices/explanation that are required to be made. It would be a good idea to distribute one so that it can be included in the request to the trustee/custodian by the participants to make the corrective distribution. If within two years, the 25 penalty wd not apply. With the employer's notice, the trustee/custodian may possibly code the amount as a return of an excess, rather than as a regular distribution (subject to 25% penalty).