IRS Q&A at ASPPA Conf

[Fully Vested]

Help!  I need to obtain the text of the IRS' Q&A 36 from the 2000 ASPPA Conference held in Washington DC.  If you have it, please send me a message and let me know how I can get in touch with you!  Thank you.   

[Mike Preston]

I'll do better:

36. If a company has a SIMPLE IRA and adopts a qualified plan, what happens? Does the SIMPLE become invalidated since it can be the only plan of the company? Would the contributions made this year have to be returned? If so when? By the due date of the employees’ tax return? Would the distributions be subject to the 25% early distribution penalty since the SIMPLE has only been in place one year?

The SIMPLE is invalidated. The contributions would have to be returned by the due date of the employees’ tax return (see 408(d)(4)). The 25% penalty would not apply.

NOTE: THE ABOVE IS NO LONGER APPLICABLE AS THE EPCRS PROVIDES FOR THE PROPER PROCEDURE TODAY.

[Fully Vested]

Mike, thank you so much for sharing the text. 

The IRS' model VCP form (Form 14568-D, August 2016 version) for this type of failure (adoption of a qualified plan with an active SIMPLE in place) suggests that correcting it requires only to cease contributions to the SIMPLE upon submitting to the VCP.  Would the VCP submission correct the "invalidation" of the SIMPLE contributions for that year such that (a) the amounts contributed for the year do not have to be returned to the employer or participant and that (b) no excise taxes would follow?  This sounds too good to be true.     

Also, Section 4.10 of Rev. Proc. 2016-51 suggests that intentionally causing a failure is an egregious failure for which the IRS can "impose a sanction that may be larger than the user fee..."  This sentence provides no cap on the amount of such a sanction.  Sounds like such an intentional failure could be risky. Anyone have any experience with this?  I have a sponsor that would like to adopt a qualified plan, and already has a SIMPLE, but intends to grant greater contributions to all participants than it could through the SIMPLE by itself. I could see the IRS coming down hard on an employer using a new qualified plan to limit contributions to a SIMPLE, but that is not the case here.   

Thank you!

Jason "Fully Vested" Douthit