SIMPLE IRA and 401(k) in same year

[Belgarath]

Wording has changed a little bit in the Revenue Procedure 2016-51 from prior Rev. Proc. - it is a bit less explicit regarding the following.

So, let's say you have a SIMPLE-IRA to which you have contributed during 2017, then you established a 401(k) and contributed to that as well. Whoops. So, when it comes to correcting, can you file VCP and count the SIMPLE as an "Excess Contribution" and refund it? Can you still have the option under the VCP to retain it in the SIMPLE, but pay the 10% excise tax on the retained amounts (but apparently get no deduction for it, so probably not a savory option anyway?) Other wonderful options?

I tend to favor refunding, particularly when fairly early in the year where participant can have time to make it up anyway under the 401(k).

Appreciate any opinions/thoughts. P.S. - anyone recently submitted one one way or the other, and if so, with what results?

[ETA Consulting LLC]

You're suggesting fixing under the "Excess Contribution", but have you considered the corrections under the "Employer Eligibility Failure"?

Good Luck!

[Belgarath]

Thanks for the response.

Yes - but the IRS language in the "fix-it" guide was causing me some concern:

"Corrective action:
If you maintain other retirement plans, cease making new contributions to the SIMPLE IRA plan. You may be able to file a VCP submission requesting that contributions made for previous years in which you maintained more than one plan remain in the employees’ IRAs."

So I was trying to determine if the funds could be left in the SIMPLE, and paying the extra 10%, but the Rev. Proc. language appears to say that this would result in no deduction for the SIMPLE contribution. If so, then it seems better to distribute as an excess - taxable in 2017, so big deal, then make up that "lost" deduction during 2017 in the 401(k) deferral.

I don't think it is crystal clear, which is why I'm seeking other opinions! FWIW, my preferred option is just to leave it there, stop all further contributions, and contribute remaining of 415 max to the 401(k) plan - deducting all of it as normal. I'm just not certain the IRS will approve that, although there's no logical reason they shouldn't...

[ETA Consulting LLC]

I still see two separate issues.  You're suggesting that the employer eligibility failure automatically results in "Excess Contributions (Where the loss of deductions and the 10% penalty applies".  We can see where EPCRS prescribes the loss of deduction to Excess Amounts, but the "Employer Eligibility Failure" seems different.  It's almost as if you're getting a free ride (e.g. no excess or non-deductible amounts); you're merely ceasing contributions and reporting the failure.  If it were the IRS's intention to have it any different, then they should've made it clearer.  I don't see any ambiguity.

Good Luck!

[Belgarath]

Thanks.

[JustMe]

If we could revive this question, I have a similar issue and wondering, since we are in January, very few contributions have been made so far to the SIMPLE IRA and the client wants to start a 401(k) plan.  Should I suggest the client go through VCP and claim an Employer Eligibility Failure for 2019 and state that all contributions cease the day after the new qualified plan has been signed into place? 

Is that it?  Will the IRS just approve this or will they consider the January contributions as traditional IRA contributions for the participants and the participants may incur some tax issues with respect to those contributions and the employer loses the deduction on those contributions?