401k deposits into a SIMPLE investment account

[cpc0506]

Hello. I am looking for some guidance here. We have been hired by a small dentist office that established a 401(k) plan as of 1/1/2003. Prior to that time, the client sponsored a simple IRA.

During the set up of the plan on your systems, we attempt to reconcile the assets at the investment house (in this case, strategic alliance) to the Form 5500 for the beginning of the plan year for which we have been hired. For this client there was a signifciant difference (besides the usual year end adjustments, eg receivable, etc.) When I approached the prior TPA, they informed me that from 1/1/2003 until 12/31/2006, the cleint was depositing the 401(k) and employer contirbutions into the Simple IRA investment accounts and that they did not establish a dedicated 401(k) account with the strategic alliance until 1/1/2007. When I asked the prior TPA about this, they indicated that they knew that the deposits should NOT have been made into the Simple IRA accounts but never tried to fix it.

Here is it now 13 years since that first incorrect transaction. How can this be fixed? On the face of it, when looking at SIMPLE investment statements it looks at if the SIMPLE plan continued to be funded between 2003 and 2006. And there is no record that a 401(k) account received monies during this same time period.

Has anyone ever encountered this before? What recommendation would you make to the client other than to hire an ERISA attorney?

[masteff]

Be careful when you say "fix" because one of the worst things you could do would be something that might reopen a closed tax year to audit risk.

[Flyboyjohn]

Is the problem that the SIMPLE investment accounts are still being recordkept and included in the 5500 as if they are part of the 401k plan?

If not then I'd be inclined to say let sleeping dogs lie...

[cpc0506]

No the issue is that part of the Simple Account balances are being recordkept as 401(k) assets since that was where the earlier 401(k) moneys were going.

[Bird]

No the issue is that part of the Simple Account balances are being recordkept as 401(k) assets since that was where the earlier 401(k) moneys were going.

I think that is what Flyboyjohn was saying...but I don't think that you can just leave it alone, either. Obviously the intent was that these were 401(k) contributions and assets. I'd think about having each participant roll over their SIMPLE account into the 401(k) - obviously plenty of time has elapsed so the 2 year period is not an issue and they would be regular rollovers, and reported so on a 1099-R. Just ignore the rollovers in your own system (I'm assuming that you are keeping track of things in your own system, and not wholly relying on the investment company to do everything, including tax returns?)

The only problem is that the IRS will almost certainly follow up, probably 2 or 3 years later, asking the participants to prove the money was rolled over, because they won't get a 5498 as they would for a rollover to another IRA, confirming receipt. Be sure to save transaction records showing the rollovers and you should be ok.

I know it's not "right" but it's ultimately what would happen, I think, if you fixed it through a correction program.

[cpc0506]

I do agree with what you are saying. But please clarify one thing for me. The prior TPA was only including the '401k value' of the Simple Accounts on the Form 5500. If we ask each partciipant to make a full rollover to the plan from the Simple Account, we will need to show Simple Portion as a rollover into the plan and recordkeep those assets separately as you generally do when you have rollover money come into the plan.

[Bird]

Yes, you are correct. (What a mess!)