Wants to set up pension plans for 2021 but SIMPLE plan is in existence.

[Jakyasar]

Hi

I am sure this discussed way before so my apologies.

I was asked for 2021 combo plan designs but now am told that there is a SIMPLE in existence.

As far as I remember , they cannot do any qualified plan for 2021.

Is there anything I am missing here i.e. something can be done?

Thank you

[Bird]

They can actually do a QP; it is the SIMPLE that is invalidated.  I've heard people here opine that it is NBD; the SIMPLE IRA contributions are treated as regular IRA contributions for limitation purposes and if it's too much then the participant has to deal with it as an overcontribution.  (I think) the idea would be that they would recharacterize all of the SIMPLE contributions as regular pay in the payroll system.  

Too many moving parts IMO and I have always just said to look ahead and drop the STUPID, er, SIMPLE as of the beginning of the year.

[Jakyasar]

How can they invalidate any deferrals and employer monies when they want to add a 401k/ps plan together with a cash balance plan?

At least there should be some 415c and 402g limits that need to be checked for. Sorry, not familiar with the interaction between the SIMPLE and QP's.

What else am I missing here?

I usually tell the client, wait till next year and that they need to terminate the SIMPLE by 12/31 of the current year.

[Mike Preston]

Doesn't the simple have a dating requirement with respect to the plan termination? I thought it was something like nine months.

[Belgarath]

They need to give employees the Notice of the SIMPLE termination no later than November 2. So you are already are technically too late to terminate it for 2022.

[shERPA]

Yes, SIMPLEs have to have a termination notice by 11/2 for the next year, so if someone has a SIMPLE they are apparently stuck with it, at least if they don't adopt a qualified plan for 2022.   

But if they do adopt a qualified plan, the SIMPLE is no longer valid, termination notice or not.  Section 408(p)(2)(D) says:

Quote

 

(D)Arrangement may be only plan of employer

(i)In general

An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees so described are eligible to participate.

 

 

It DOESN'T say the employer cannot adopt a qualified plan, it just says the SIMPLE won't be a qualified salary reduction arrangement.  So it may or may not be terminated if a timely notice wasn't given, but regardless, it is still invalidated for the year.

 

 

[AlbanyConsultant]

That's an interesting distinction, @shERPA.  I just got a call from a financial advisor representing a client who has a SIMPLE and they are projecting to go over 100 employees early next year... so my immediate thought was "have they already terminated their SIMPLE for 2022?"  But is that not as necessary if they establish a 401k plan effective 1/1/22 and tell the participants that the SIMPLE elections are therefore invalid starting on 1/1/22 (so here, defer into this 401k plan instead)?

[shERPA]

Well SIMPLEs have a transition rule for employers that are on the ~100 ee bubble, so they might be fine with a SIMPLE in 2022.  But if they want a 4k in 2022, it seems to me they can go ahead and establish it.  The code doesn't say they can't adopt a qualified plan, it just says the SIMPLE is no longer a qualified salary reduction arrangement if ees benefit in a qualified plan.  The best time to do this is as of 1/1 before any contributions are remitted to the SIMPLE for the calendar year, to avoid the whole issue of what to do with them, how to communicate it to ees and how to report on payroll, W-2, etc.