SIMPLE IRA Exclusive Benefit Rule

[R. Butler]

Plan Sponsor has a SIMPLE IRA. The SIMPLE IRA has been around several years. Plan Spnosor now wants a DB plan & a 401(k) plan. I know that Plan Sponsor cannot adopt another qualified plan during 2005 without violating the exclusive plan rule. Plan Sponsor wants to know the consequences of violating the exlcusive plan rule & having the SIMPLE IRA invalidated.

1. It is my understanding that 2005 contributions would have to be returned to employees prior to the due date of the employees' 2005 tax return. The early withdrawal penalty would not apply to that money

2. Employer gets no deductions for 2005 SIMPLE contributions.

3. Would there be any issues with years prior to 2005? I don't see that there would be, but we don't do alot with SIMPLEs anymore.

4. If Plan Sponsor intentionally had the SIMPLE IRA invalidated is there any reason to filing under EPCRS?

5. Are there any issues I am missing?

Thanks in advance for any guidance.

[Gary Lesser]

In general, the SIMPLE IRA contribution amounts are to be included on Form W-2 (in box 1). Participant's can remove timely (with gain, which cd be negative) or be taxed twice.

If the simple is being terminated the financial institution and participants should be notified of the termination. Letter from employer may also help participants remove funds from the trust/custodial account. The participant may have to "explain away" why the 10/25% penalty tax doesn't apply (if applicable). Unless entire account is attributable to excess contributions, note that some institutions calculate "earnings attributable" and others don't.

Since correction under the Code is possible (EPCRS not needed).

Nothing to indicate any problems with prior years; thus okay.

No deductions for 2005 (including owners, e.g., if self-employed). That, plus inclusion on Form W-2 (whether or not actually distributed/removed by participants adjusted for earnings) would appear to avoid the nondeductible contribution penalty tax.

Hope this helps.

[R. Butler]

It helps.

Thanks