FY SARSEP (7/31/05 plan yr end), can SIMPLE 401k be estab if SARSEP terminated 12/31/04?

[maverick]

Situation: SARSEP plan year runs 8/1 to 7/31. Employer wants to make SARSEP contribs 8/1/04 to 12/31/04, then start a SIMPLE 401k 1/1/05. I checked the SEP/SARSEP/SIMPLE forum back to "the beginning" and did not see a relevant post. Sal's 2004 ERISA Outline (chap 12, section V, pg 12.33, sub-par 1d) discusses the exclusive plan rule for non-calendar plans, and gives an example of a fiscal year SARSEP maintained for a portion of the calendar year. I am lead to believe that if SARSEP contributions stop 12/31/04, it would be okay to establish a SIMPLE 1/1/05. But on the previous page (sub-par 1c) it says "If the qualified plan is not maintained on a calendar year basis, the employer must make sure no benefits accrue under the plan for any plan year that begins or ENDS (emphasis added) within any calendar year in which the SIMPLE plan will be in effect. My idea would be to "terminate" the SARSEP 12/31/04, then there wouldn't be a plan year ending in 2005, the first year of the SIMPLE. Thoughts?

p.s. Sorry for the long post, I wanted to lay out the entire scenario.

[Bird]

Sounds good to me.

[Gary Lesser]

Although it does sound good, i'm not so sure that merely terminating the SIMPLE IRA will be sufficient. Deduction issues aside, it might be better to amend the plan's FY to the CY first and then terminate it effective 12/31. [see SEP LRMs (first note to reviewer, March 2002) regarding changing the plan year, reproduced below.] There being no guidance on this issue, a PLR request should be considered by client. In general, the plan year is either the CY or FY, but the LRM suggests that there could be a short plan year IF the plan is amended.

(Note to reviewer: These LRMs assume the SEP is maintained on a calendar-year basis; however a prototype SEP may provide for an election whereby an employer may elect to use either the calendar year or its taxable year for participation and contribution/allocation purposes. The same "year" must be used for both participation and contribution/allocation purposes. The SEP must provide that if the employer already maintains a SEP and desires to change the SEP's "year," an employee who has any service during the short year must be given credit for that service in determining whether he or she has performed service in 3 of the last 5 years. Such an employee must also receive a contribution for the short year if he or she would have been entitled to a contribution for the "year" in which the short year begins if there had been no change.)