Simple 401(k) Plan restated as 401(k) Plan ?

[Guest RSNOW]

It appears from my reading the rules on a Simple 401(k) Plan are the same as for a Simple IRA plan in the "exclusive plan" rule (needs to be the only plan of the employer). Is there anything out there that would allow a Simple 401(k) Plan [vs. a Simple IRA Plan] to be amended (restated) into a regular 401(k) plan mid-year and not violate the "exclusive plan" rule ?? It sounds like the def'n of "exclusive plan" for Simple IRAs are no accruals/contributions can be earned in the same calendar year under the qualified plan, and maybe that's "exactly" the same criteria a Simple 401(k) Plan, but I'm hoping that maybe with a plan/trust arrangement a Simple 401(k) Plan might have an amendment option even within the same calendar year. Any thoughts ??

[Gary Lesser]

Converting a SIMPLE 401(k) to a non-SIMPLE 401(k) mid year would probably cause there to be bad allocations (remember the notice given employees) for the plan year. If it is already done, it can be corrected under the EPCRS? Once the plan is amended the 401(k) SIMPLE became bad for the year. Thus, excesses wd be created.

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 401(k) SIMPLE plan. 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 (see Q 15:63).

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 among clear mistakes 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)©, IRC §4972©(2)]

5. In May 1999 the IRS informally agreed with propositions 2 and 4 above (see, too, Q 2:90). [General Information Letter issued to Gary S. Lesser, May 18, 1999; see also Rev Rul 91-4, 1991-1 CB 57.]

[Lori H]

so would it be better to just, rescind the SIMPLE 401(k) provisions during the plan year and go traditional 401(k) with an effective date being the first day of the next plan year?