Terminate a SIMPLE - IRA mid year and Start a 401k?

[Guest SWH]

I think that I know the answer to this, but since there are always people with more experience, I thought that I would give this a shot. Can I terminate a SIMPLE IRA mid year and start up a 401k plan the same year for the same company? I think that my answer is no for several reasons -- calendar year requirement -- no other qualifed plan in same year, etc. , but I didn't know if anyone knew of a way around these reasons.

[12AX7]

This is from the IRS Employee Plan News (Summer 2009 Edition):

SIMPLE IRA plans are maintained on a whole-calendar-year basis. A SIMPLE IRA plan must continue for the entire calendar year, funding all contributions promised in the employee notice. An employer can terminate its SIMPLE IRA plan prospectively, beginning with the next calendar year, after it has informed its employees that there will be no SIMPLE IRA plan for the upcoming year.

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.

[Guest SWH]

That's what I thought. I was hoping that someone knew one of those nifty ninja ways around those rules that seem to be known in the bright minds that lurk in these boards. Thank you for such a great answer!

[Jim Norman]

The newsletter seems a little overly broad. If a 401(k) plan is established, the SIMPLE is invalidated back to January 1. Question is, what are the consequences of this and are they worth it? Per 408(p)(2)(D), the SIMPLE would not be "treated as a qualified salary reduction arrangement".

[John Feldt ERPA CPC QPA]

Look at #2 on the list from the IRS link below and the explanation further down of how to fix it. The SIMPLE gets invalidated, as already stated, and this checklist makes an attempt to explain what happens to the SIMPLE, but it also leaves a lot of unanswered questions too.

http://www.irs.gov/pub/irs-tege/simple__checklist.pdf