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SIMPLE-IRA contributions made in 2015, 401k to be adopted

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Potential client apparently wants to adopt 401(k) in 2015, but already mistakenly allowed deferrals into their SIMPLE-IRA plan. I don't have any dollar amounts available, but I believe they are small, as only one payroll deduction for January in a small company.

Now, RP 2013-12 says this can be corrected under VCP - filing fee of $250, plus the 10% if the assets are retained rather than distributed. I'm interested in any thoughts on the following:

1. Any thought on retain vs. distribute?

2. It isn't clear from the instructions - is the employer still required to make the match? I would presume so - and if so, is it deductible? I would presume not, as this would be an "excess" contribution? (I changed my mind - if the correction is approved, it should be deductible, I think)

3. Is it necessary to request a waiver of excise tax under 4972? If the entire amount of the match, if required, is a nondeductible contribution, then it would seem like requesting the waiver would be routine? (if I'm correct on 2 above, this is N/A)

4. Tax consequences, if any, to the participants, if the deferrals are retained rather than distributed? (none, if 2 above is correct)

5. New edit - does anyone consider the SIMPLE as Plan #001, 002, etc.? For example, if someone previously had a SIMPLE, and properly terminated it, then establishes a 401(k), do you count the 401(k) plan as Plan #001, or 002? Reason I ask is that the Revenue Procedure asks for the Plan # of the SIMPLE, and I would not normally have assigned it a Plan #.

Any other thoughts? I've not actually seen one of these until now...

P.S. another thought that occurs to me - how does all this tie in with the "requirement" where the IRS says that in order to terminate a SIMPLE, you must notify the employees prior to November 2. I would say that the existence of the "fixes" in this Revenue Procedure override the IRS information on their website - otherwise, an employer that fails to provide the SIMPLE notice can't establish a 401(k) for the following year, and has no recourse if they do! But it does seem to bring up a strange inconsistency - if you have a SIMPLE, and don't give the advance notice of the termination, you are theoretically stuck with it for all of the next year. If, on the other hand, you just establish the 401(k), then you can fix this with IRS blessing under RP 2013-12.


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I have a similar situation. Client deposited too much in 2014, so investment company "opened" a SIMPLE IRA for her and deposited $15,500 for 2015. She doesn't have employees.

SOLOK was opened prior to knowing about SIMPLE IRA situation. Would Client be able to defer $5500 plus $3000 catchup? And make employer contributions of $35,000 to put her at $59K in both plans? Cost to file under VCP of $250 + 1550 may be worth it for the additional tax savings and the extra retirement savings. Or would ya'll recommend not to fund the SOLOK this year.

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