Feedback to prior post re: IRS audit

[stevena]

Awhile back I posted a question regarding what "maintaining" a plan meant because a client of mine maintained a profit sharing plan (had not put contributions into the plan in a few years) but set up a SIMPLE IRA concurrently.

I got some feedback from this board, and wanted to come back to tell you what the IRS said.

They disqualified the SIMPLE IRA saying that "In order to establish a SIMPLE IRA, the employer cannot currently maintain another retirement plan". The fact that there has been no contributions to the plan does not mean, to this auditor at least, that the plan has not been "maintained". The IRS response letter suggests that if a deduction were to be taken for a contribution for a year, that it should have been put into the profit sharing plan if the profit sharing plan was still maintained, and if they wanted to open the SIMPLE they should have terminated the PSP first.

I thought you all might be interested in the response we got from the IRS.

[R. Butler]

That is somewhat surprising because IRC § 408(p)(2)(d) simply states that you can't accrue a benefit under another qualified plan. A plain reading the Code section actually seems to contemplate this situation "...if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made..."

D) Arrangement may be only plan of employer

(i) In general

An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were 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. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees so described are eligible to participate.

[mbozek]

Apparently IRS personnel do not read IRS publications. Pub 590, P 9 defines mantaining another qualified plan as making contributions to, or accruing a benefit under another retirement plan for service in any year beginning with the year the SIMPLE becomes effective. There is no requirement that the qualified plan be terminated.