Simple

[Guest boston431]

Our financial advisor wants us to terminate our profit sharing plan (it's two years old) and put a simple plan in place. I thought there were some issues centering on "permanency" when you terminate a plan (e.g., you are supposed to establish a plan for it to continue and if you terminate a plan and then establish another plan without some time in-between, the second plan is deemed to be a continuation of the first plan, etc.). Does this apply in a situation where you are going from a profit sharing plan to a simple plan? Is there a specific way you are supposed to handle this? I found guidance on going from a money purchase plan to a profit sharing plan - but nothing involving simple plans.

[Gary Lesser]

There are actually two rules involved. One involves the concept of a profit-sharing plan, see Treasury Regulations Section 1.401-1(a)(4)(b)(2), which reads as follows:

(2) The term "plan" implies a permanent as distinguished from a temporary program. Thus, although the employer may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Especially will this be true if, for example, a pension plan is abandoned soon after pensions have been fully funded for persons in favor of whom discrimination is prohibited under section 401(a). The permanency of the plan will be indicated by all of the surrounding facts and circumstances, including the likelihood of the employer's ability to continue contributions as provided under the plan. In the case of a profit-sharing plan, other than a profit-sharing plan which covers employees and owner-employees (see section 401(d)(2)(B)), it is not necessary that the employer contribute every year or that he contribute the same amount or contribute in accordance with the same ratio every year. However, merely making a single or occasional contribution out of profits for employees does not establish a plan of profit-sharing. To be a profit-sharing plan, there must be recurring and substantial contributions out of profits for the employees. In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.

If more than two years old, a business necessity to justify termination of a QP in favor of a more simplier to administer plan like a SIMPLE IRA can be found. The burdens of ERISA, administrative costs and burdens, complex and ever-changing rules, and so on......

If you are 'speaking' about converting to a 401(k) Simple, the P/S plan can be amended or restated in it's entirety to a 401(k) Simple without termination of the P/S plan.

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