Simple IRA / 401(k)

[Guest moltengater]

A company had a simple IRA in 2004. They closed the simple IRA and started a safe harbor 401(k) plan in 2005. They owed a contribution to the simple IRA for the 2004 year but instead of depositing the funds into the simple IRA they sent the money into the 401(k) plan and earmarked it as a safe harbor contribuiton.

We determined at a later date - 2006 when doing compliance testing on the plan that the funds should have gone to the simple IRA and not the safe harbor 401(k) plan. The simple IRA is closed and will no longer accept the deposit.

What options does the client have if any to do with the funds? Can they keep it in the 401(k) plan?

[ERISAnut]

Each employee should open a new SIMPLE IRA account in order to receive the company contribution they are entitled to under the SIMPLE IRA arrangement.

As for the amounts contributed to the Safe Harbor 401(k), this would be a separate issue as to what "definitely determinable allocation formula" inside the plan was being honored to make those contributions. These amount should be used as 2005 contributions since they were contributed then. This would at least keep the 401(k) from being damaged.

The issue of the late contribution to the SIMPLE IRA would be a good one.

This is just a bit of consistency where someone failed to treat an apple as an apple (and an orange as and orange). You CANNOT make a fruit salad out of a SIMPLE and a 401(k).