SIMPLE to 401K Mid-Year Question

[Guest 401kguy]

Plan sponsor has SIMPLE and is adopting 401K as of Setp. 1, 2007 - how does one treat the EE's SIMPLE contributions from Jan - Aug? Thanks.

[Kimberly S]

It is my understanding that if the employer has sponsored a SIMPLE, they are not eligible to establish a 401(k) until the following year.

[Archimage]

Kim is correct. You can't do that.

[Bird]

To be precise, you can't have a SIMPLE in a year when the employer has any other plan. So while it's generally not advisable to start a 401(k), it can be done but it invalidates the SIMPLE contributions. I believe SIMPLE deferrals must be recharacterized as "regular" IRA contributions, subject to IRA limitations. Presumably W-2s would reflect the deferrals as regular taxable wages. I guess employer contributions would be tacked on to wages too, although since payroll taxes weren't withheld I don't know how that is resolved. Messy at best.

[Tom Poje]

it is not entirely clear if you can convert a SIMPLE 401k during the year. certainly can'tt be done if you have a plan that used IRS model language. The ERISA outline book even suggests it might be possible (see 11.435) but there is no clear guidance. given that fact, I'm not sure I would want to switch.

[Sully]

To be precise, you can't have a SIMPLE in a year when the employer has any other plan. So while it's generally not advisable to start a 401(k), it can be done but it invalidates the SIMPLE contributions. I believe SIMPLE deferrals must be recharacterized as "regular" IRA contributions, subject to IRA limitations. Presumably W-2s would reflect the deferrals as regular taxable wages. I guess employer contributions would be tacked on to wages too, although since payroll taxes weren't withheld I don't know how that is resolved. Messy at best.

I have a client that tried to do this last year but the big mutual fund company refused to reclassify the contributions.

[Bird]

I just realized I was assuming this was a SIMPLE IRA and other posters might be assuming it is a SIMPLE 401(k), so some of the apparently conflicting answers might all be correct.

[CTipper]

Everything I've read says "can not."

And, it's calendar year based, not plan year. So, if you're thinking of doing a 9/1 to 8/31 plan year, you can't because you've still got a Simple contribution made during the current calendar year.

I don't think it matters whether it's Simple IRA or Simple 401k.

Christopher