SIMPLE IRA - when employer goes out of business

[Guest GB07]

What happens to a SIMPLE IRA plan maintained by an employer that goes out of business mid-year? I understand you cannot terminate a SIMPLE IRA plan mid-year, but I am curious about what happens in this situation. Thank you!

[ETA Consulting LLC]

The SIMPLE IRA becomes disqualified for that year (but only with respect to contributions made during that year). So, it's not the end of the world, but you may file a $250 VCP submission to the IRS in order to approve the mid-year termination. While there is no clear precedent on this particular scenario, you can apply the methodology of correcting it as if another plan existed during the year. In such event, the employee deferrals (plus earnings) would be distributed to the participant with a 1099-R coded as ineligible for rollover. The employer contributions will be returned to the employer and subject to a 10% excise tax as they were non-deductible contributions. A request "MAY" be made under VCP to distribute only the HCEs while "letting sleeping dogs lie" for the NHCEs. The IRS has approved many stranger requests under VCP.

This is merely one of many approaches given that there is no clear precedent.

Good Luck!