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Simple IRA + Profit Sharing Plan

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Company has a Simple IRA (with 100% match up to 3%) in effect for calendar 1999. Decision has been made to replace it with a profit sharing plan effective 1/1/2000. Simple IRS will be terminated 12/31/1999.

1) Can profit sharing plan be adopted in late 1999 with an effective date 1/1/2000, or must is be adopted during 2000? (I suspect the former is OK.)

2) Other than no new money going into the Simple IRA after 1999, what happens to the existing money?

3) The plan sponsor would have preferred to have the profit sharing plan in effect 1/1/99. It is prevented from doing so because of the Simple IRA. Can the Simple IRA be retroactively "converted" into a profit sharing plan? (I suspect any

solution in this area would be complex and not worth the trouble.)


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  • 2 weeks later...

Good questions.

(1) Yes. Code Section 408(D)(i) regarding the "only plan of the employer" rule would not be violated since no contributions are made or benefits accrued for service during the applicable period (in this case 1999).

(2) Generally, it will just remain in the SIMPLE-IRA until the participant withdraws amounts.

(3) No, but the SIMPLEe becomes a "Complex" (a word I take pride in inventing); thus, all SIMPLE contributions become "wages." The participant should be notified that the SIMPLE contribution was not allowable because of the adoption of the company's p/s plan and that the entire amount should be w/d before the due date of the individual's federal income tax return to avoid the cummulative 6% penalty tax. Since the amount is treated a "wages" by the employer, the penalty for making nondeductible contributions would seem to be eliminated (IMO). Hope this helps..Gary

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Thanks Gary.

I like your comment that the "Simple" plan becomes "Complex." I doubt they will go through the approach of converting the Simple contributions to wages, since the employees won't be happy. It will take too much effort, I suspect, to get them to understand that is happening.

You described the "recharacterization" of the employee deferrals into wages. For my information, what about the company contribution (the 100% match up to 3%)? Would that be distributed to employees as well, and treated as wages?

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