Terminating SAR-SEP and establishing a 401(k)

[Guest Merrr]

Can a plan sponsor can terminate their SAR-SEP and establish a 401(k) plan within the same calendar year? This has been a deferral only SAR-SEP (no employer contributions). Form 5305A-SEP states that the plan sponsor cannot maintain another qualified plan. What it doesn't say is if they can terminate the SAR-SEP and then establish a qualified plan. I understand that the 402(g) limit would apply to participants and any deferrals made into the SAR-SEP would count towards the 2006 limit. Any thoughts would be greatly appreciated.

[Bird]

It says not to use the 5305A-SEP "if you currently maintain another plan" and I'd be comfortable taking that literally - that is, terminate the SARSEP and start the new plan now. I would just make sure to monitor the 402(g) limit as you noted.

[wsp]

I did exactly this earlier this year and found that if the SARSEP was established using 5305A-SEP then you had to terminate in year 1 and establish the new plan in year 2. But, if it was originally established using a different document than 5305A-SEP then you could (depending on the terms of the document) terminate and establish a new 401(k) in the same year.

As far as testing goes...402(g) is combined but ADP/ACP is separate so take that into consideration when looking at the data and determining the best time to terminate. Quite possibly might make sense to wait and terminate effective 12/31 if the 401(k) isn't going to be safe harbor.

[saabraa]

In a March thread regarding Form 5305-SEP (not 5305A-SEP), Gary Lesser pointed out that failure to follow the plan document is now mentioned as a SEP violation in the correction Revenue Procedure. His conclusion was that another plan could not be maintained in the same year. He further stated the way to deal with this would be to amend the Sep using a different plan document, one which does not contain the problematic language. Looking at both the 5305-SEP and the 5305A-SEP, I see the language regarding simultaneous maintenance being a problem. I don't immediately see why the whole year must comply with that provision, once the Sep or Sarsep is terminated. To be safe though, I'd say go with Gary's suggestion that the Sarsep be amended to a different document (in which case there's not necessarily a reason to hurry in terminating it).