SIMPLE IRA contribution and New 401k plan

[Guest BarryK]

An ER has had a SIMPLE IRA operating for 5 years. He has made contributions to it for January 2004. He notified all his EEs that he was terminating the plan after January 2004. He wants to establish a 401k profit sharing plan for 2004. Can he do this? If he can, what is the effect of the 401k psp's implementation on the SIMPLE's January contribution?

[Lame Duck]

Yes, he can establish the 401(k) plan. Code Section 408(p)(2)(D) provides that (An arrangment shall not be treated as a qualified salary reduction arrangement for any year if the employer maintained a qualified plan with respect to which contributions were made, or benefits accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made." In more understandable terms, the law prevents the employer from maintaining a SIMPLE in any year in which he maintains another qualified plan. It does not mean you cannot adopt another plan in any year in which you have a SIMPLE.

There is a good discussion with an appropriate example in Q14:50 of the SIMPLE, SEP and SARSEP Answer Book, Sixth Edition. It says "All SIMPLE contributions become excess contirbutions and should be treated as wages by the employer on the Form W-2."

I believe this question has been addressed by Gary Lesser before in these posts. You might try searching for additional information.

[Guest BarryK]

Thanks for the information Lame Duck.