Termianting a SIMPLE IRA

[R. Butler]

Plan sponsor wanst to adopt a qualified plan. Plan sponsor currently has a SIMPLE IRA & failed to give notice of termination prior to the 60 day election period. It is my understanding that if plan sponsor adopts a qualified plan during 2011 that it invalidates the SIMPLE IRA and that contributions made during 2011 would be considered excess cotnributions. Is there anything that prevents the plan sponsor from informing employees today that he is going to adopt a qualified plan during 2011 and that if that they continue contributions to the SIMPLE IRA they will be excess contributions?

Thanks in advance for any guidance.

[Gary Lesser]

There is no 60-day notice required to terminate the SIMPLE-IRA plan. Must be terminated on or before December 31. The trustee/custodian should be notified that no further contributions will be made and none should be accepted. Thus, salary reductiuon to this plan will just cease. And "yes," the qualified plan would invalidate the SIMPLE.

Hope this helps.

[R. Butler]

Just got a similar issue.

Plan sponsor wanted to terminate a SIMPLE 401(k), but failed to execute the resolution prior to year end. What actually happens if they terminate now for 2011? They use the 3% match and no one is contributing. I'm just curious about the consequence.

Thank you for any guidance.

[12AX7]

Regarding termination of the SIMPLE IRA, I was also not clear on the issue and contacted IRS. I was lead to the IRS' Employee Plan News (Summer 2009/Volume 9) and here's what it says about termination of a plan:

If you choose to terminate your SIMPLE IRA plan, notify the financial institution that you chose to handle the SIMPLE IRA plan that you will not be making contributions for the next calendar year and that you want to terminate the contract or agreement with it. You must also notify your employees within a reasonable time before their 60-day election period that you are discontinuing the SIMPLE IRA plan. You do not need to give any notice to the IRS that the SIMPLE IRA plan has been terminated.

I know there is nothing in the Regs regarding termination of a SIMPLE IRA, however I abided by the advice provided in the newsletter. Gary, I would appreciate your thoughts on this. Thanks.