Going from Simple to 401(k) plan

[Guest CathyS]

Have a client that is getting rid of their Simple in favor of a 401(k). Participants have already contributed some to the Simple for 2007. I'm wondering for the 2007 Plan Year, which contribution limits would apply - those for Simple or 401(k). I'm not so much worried about the participants going over as I am the owner and spouse who contribute the maximum each year.

Along these same lines, would the employer have to make the usual 3% to the Simple then on comp up until date the 401(k) is actually effective? The 401(k) will include a safe harbor nonelective of 3%. Could the employer just deposit that based on the entire year comp rather than doing a portion of the year to each to satisfy the Simple contribution and the SH nonelective? Of course, the doc would have to state that for the first year, partial comp applies, correct?

[Jim Chad]

If you have contributions in 2007 to the SIMPLE PLan, it would be a bad idea to start a 401(k) in 2007 because this would disqualify the SIMPLE Plan, at least for that year. I think the exclusive Plan rule is section 408(p) (2) (d).

[Archimage]

You can't have a SIMPLE and a qualified plan in the same year. Your client cannot do a 401(k) plan until 1-1-2008.