Newly established 401(k) but owners funded SIMPLE IRA

[Lori H]

Small 401 was established in 2015. owners have not deferred into it but were funding their SIMPLE IRA. Can those contributions be reversed or should the SIMPLE file a VCP? I know IRC 408(p)(2)(D) states an employer cannot maintain a SIMPLE IRA and another qualified plan in same calendar year.

[ETA Consulting LLC]

But, when you do, it is the SIMPLE IRA that gets disqualified; not the 401(k). So, you can look at the correction of the SIMPLE IRA through VCP for the $250 filing fee. You'd merely cease making contributions to the SIMPLE IRA; no distributions necessary.

It's a pretty convenient gift from the IRS.

Good Luck

[Lori H]

Disqualified.....if you do not do VCP?

[ETA Consulting LLC]

The exclusive plan rule is a SIMPLE IRA rule; not a 401(k) rule. So, if you contribute to both a SIMPLE IRA and another qualified plan during the year, then it is the SIMPLE IRA that failed to follow the rules for the year; not the other qualified plan.

The easiest fix is to pay the $250 to file the SIMPLE IRA through VCP; since they already have a proposed correction to merely cease contributions to the SIMPLE IRA and do nothing else. What happens if you don't fix it? I don't know.

Good Luck!

[Lori H]

I understand VCP is the correct course of action, what if they did not contribute to the 401(k)? Does this change anything?

[Lori H]

Could they contribute to the 401(k)?

[Tom Poje]

even though I would like to be a Grinch and say you are in deep with violations and stuff, even Code section 408(p)(2)(D)
only says
Can't be a SIMPLE if "employer maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year...bleh, bleh, bleh"

if no one received anything in the 401k for the year in question, I don't think a violation has occurred.

the ERISA Outline book, has an example (chap 12 section V part B1 c 3
"if any elective deferrals were made..." so it appears that the ability to defer is not the driving force, but rather if deferrals were actually made.

[Lori H]

even though I would like to be a Grinch and say you are in deep with violations and stuff, even Code section 408(p)(2)(D)

only says

Can't be a SIMPLE if "employer maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year...bleh, bleh, bleh"

if no one received anything in the 401k for the year in question, I don't think a violation has occurred.

the ERISA Outline book, has an example (chap 12 section V part B1 c 3

"if any elective deferrals were made..." so it appears that the ability to defer is not the driving force, but rather if deferrals were actually made.

That is what I am thinking too. The SIMPLE IRA FIX IT GUIDE on the IRS website says "You can't contribute to a SIMPLE IRA plan for any calendar year in which an employee either: 1) receives an allocation of contributions in a DC plan, such as a 401(k)" receives being the operative word. Well if they have a 401(k) participated in the SIMPLE IRA but did not in the 401(k), I am of the opinion a VCP is not necessary.

[Lori H]

What if the SIMPLE IRA was rolled over to the 401(k)? Would that be considered "receiving an allocation of contributions"?

[K2retire]

A rollover is not considered to be an allocation for 415 purposes. It seems logical that the same would be true for your purpose.