Simple IRA and 401(k) in the same plan year (revisited)

A small non-profit (no HCEs) has a simple IRA that they have been contributing to all year.  They are considering a 401(k) and want to know if it is possible this late in the year to start the 401(k) and submit the simple IRA under VCP.

Is this even possible this late in the year?  I know the VCP process for correcting simples is more streamlined, but I had always thought that the later you get into the year the less likely the IRS would approve.

Thanks.

Why would anyone want to bother?  Unless I'm missing something, it just makes no sense to do this, let alone want to this.  What is gained for a small non-profit to go to a 401(k) at this point?  Somebody needs to nip this in the bud and say "No you can't do it, period, start the 401(k) on 1/1/18."

There are a few of the participants who have maxed out the simple deferral limit and were hoping to defer the rest of the 402g limit into a 401k.

Additionally, they were hoping to make an employer contribution greater than the simple match that they are currently making.

They started exploring this much earlier in the year, the advisor thought the issue was dead, and then it got brought up again the other day. 

Isn't this correctable by a $250 VCP filing?

Hello Mike,

Yes, I believe that is the VCP fee.  Had this plan sponsor requested the correction earlier in the year I would not see an issue. 

My concern was if the IRS would still consider the correction acceptable if they were starting the 401(k) in the last couple of months of the year. 

Thanks.

The IRS has stated over and over that they will abide the Rev. Proc.

I'm no expert on VCP filings but the SIMPLE IRA Fix-It guide says "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."  (My emphasis)

I guess if you filed in 2018 then 2017 would be a previous year, so maybe that's not particularly relevant, but I have a hard time knowingly busting a SIMPLE.  $250 is a small price but how much does it cost to prepare the filing...in which, I imagine, you have to explain what happened - "we knew exactly what we were doing and did it anyway."

I see very little difference between this and setting up a DB plan late in the year where a SIMPLE is in place.  The IRS has routinely approved the filings.  Admittedly the filings are not done until the year after the DB is established.