NO Contributions to SIMPLE but not officially terminated

[Lori Foresz]

Hi,

ER ceases all contributions to SIMPLE plan as of end of 2004 and put a 401(k) in place 1/1/05. Does the SIMPLE need to be officially terminated prior to 2005 in order to avoid the exclusive plan rule or does the fact that no EE accrues a contribution under the SIMPLE make it okay? I seem to recall this is the case.

Additionally, I presume that if EEs have participated in the SIMPLE for 2 years, they can roll their money into the 401(k) regardless of whether they or the plan have terminated since there is no restriction on SIMPLE distributions. Is this a correct understanding? My SIMPLE knowledge is a bit lacking.

thanks much!!

[Gary Lesser]

No. But it would be a good idea to notify the trustee or custodian that no further contributions will be made if the plan is to be terminated. The employees must also be notified of the discontinuance (according to DOL/EBSA and IRS publications). Hopefully, the "2005" notices were not provided (other than to notify them of the discontinuance)!

It probably is NOT a good idea to rollover the Simple IRA into a 401(k) if the new plan is a Simple 401(k). A SIMPLE 401(k) plan may only receive elective and matching contributions under Code Section 401(k)(11)(B)(i)(III). IRS model language may suggest otherwise, but the Code speaks clearly. Also, each participant must satisfy the two-year rule separately.

Hope this helps.