SIMPLE-IRA Plan Terminating Mid-Year - Is Notice Required

[AJC]

A SIMPLE-IRA plan was adopted by an employer that already had a 401(k) plan, and both plans operated side by side for a number of years. The employer has been notified of the operational failure and agrees to stop contributions to the SIMPLE-IRA plan immediately and terminate the plan. Is a plan termination notice required before stopping contributions?

[Appleby]

A SIMPLE IRA cannot be terminated mid-year https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans

Likely, the 401(k) contributions will need to be corrected, as they are not permitted to be made when the employer maintains a SIMPLE IRA.

The administrator for the 401(k) should be notified so that they can take corrective actions.

[John Feldt ERPA CPC QPA]

Pretty sure it’s the SIMPLE that is invalid here and the 401(k) plan is okay.  Employees certainly would have a case for a claim, but contributions cannot be made to the SIMPLE if the employer is contributing to another plan. Could be fixed favorably with a VCP filing. 

[401 Chaos]

I think the general correction for maintaining the SIMPLE as an ineligible employer would permit it to be stopped / terminated mid-year under EPCRS.   It's been unclear to me that the correction for that would permit an employer to start up a new 401(k) Plan mid-year after terminating an invalid SIMPLE but here where the 401(k) already exists maybe that's not a concern or question. 

As to the OP's actual question, it is not clear to me that a termination notice is legally required in this instance and the EPCRS / fix-it guide information linked here do not indicate that one is required.  That said, why wouldn't the employer provide some sort of notice to the employees that will no longer have amounts contributed to the SIMPLE.  And presumably if the 401(k) continues, work to get them to participate in the 401(k)--assuming that's intended / feasible.

https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-your-business-sponsors-another-qualified-plan

 

[AJC]

I worked with a another plan sponsor 2 years ago who had a different operational failure requiring mid-year termination and VCP filing. This time around, I was just wondering what some other service providers were doing in a similar situation regarding the timing of the termination notice. We did provide a termination notice of less than 30 days for the other client in 2019, which was included in the VCP filing, and the client received an IRS compliance  statement. We are providing a termination notice for this current client of less than 30 days as well, as it appears to us that immediate cessation of the SIMPLE contributions is called for.