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401k Profit Sharing to SIMPLE


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I have a dental practice with a calendar year PS/401k with a 3% non-elective SH contribution. On 12/1/09 a Safe Harbor notice was given to the employees stating a 3% non-elective contribution would be made for them in 2010.

The doctors now say they don't have the money to fund a 3% SH for 2010 due to their economic situation. I prepared an amendment to cease their SH non-elective contribution on 1/6/10. The SH non-elective will be funded through 2/5/10 and we'll use ADP testing for the 2010 plan year.

This plan is also top heavy and there is not much 401k participation with the staff. This severely limits the doctors to what they can contribute to the 401k.

Now the doctors are talking about starting a SIMPLE IRA for their company. Since the PS/401k will be funded through 2/5/10 with a SH contribution, doesn't this prevent them from starting a SIMPLE IRA during 2010?

Also they are asking if they can retroactively terminate their plan as of 12/31/09 to avoid making contributions for the 2010 plan year. I don't think this would work either.

Any other suggestions of what can be done?

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It is too late to terminate the PS for 2009. If contributions are made to the PS plan for 2010, then a SIMPLE IRA plan could not be effective any sooner than January 1, 2011, because of the exclusive plan requirement. IRC 408(p)(2)(D)(i). There is a special rules for union employees in a qualified plan that are not eligible (excluded from) a SIMPLE IRA plan. Hope this helps.

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