Has a SIMPLE and wants a 401(k)

[Jim Chad]

A company wants to start a 401(k) plan now, for the usual reasons.

They just started deferring in May so the 3 Participants don't have much money yet. I know that if they take the employee money out of the disqualified plan this year, the taxes are a wash.

But they each have between $100 and $200 in employer match? How is the match money handled?

[emmetttrudy]

If they have contributed to a SIMPLE for 2013, they cannot start a 401k Plan until 1/1/2014. They must provide a notice to all employees by November 1 stating the SIMPLE will be terminated. Then 1/1/2014 they can start a 401k, not before.

[Jim Chad]

The rest of the story is that if they do they will disqualify the SIMPLE Plan. And some people think the penalties aren't too bad. This is being considered here. Does anyone know what happens to employer money that has already been deposited?

[emmetttrudy]

I wouldnt even consider it. Anything contributed to a 401k Plan that is set up in 2013 would be going into a plan that is not permitted in the first place, which would mean they would not be subject to favorable tax treatment. Some people obviously think the rules don't apply to them, but I wouldnt advise anyone to go down that route.

[John Feldt ERPA CPC QPA]

If the 401(k) plan is established, the SIMPLE gets in trouble and no more SIMPLE contributions can be made. The money going into the 401(k) plan is permitted, but no more can go into the SIMPLE. Here's the IRS fix it guide:

http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-Fix-It-Guide-–-Your-business-sponsors-another-qualified-plan