Not terminating SIMPLE PLAN before initiating 401k Plan

Submitted by Brian Devers on Mon, 2018-08-13 14:52

Client neglected to inform he had a SIMPLE PLAN (and has made both company contributions and participant contributions this year) and we have established a profit sharing/401k safe harbor plan (and have made the company match on participant deferrals).

Just found this out from the client.

What is the remedy??



Submitted by William Tuttle on Mon, 2018-08-13 16:23

Earlier IRS Corrective Action:

  1. If you maintain other retirement plans, cease making new contributions to the SIMPLE IRA plan. You may be able to file a VCP application requesting that contributions made for previous years in which you maintained more than one plan remain in the employees’ IRAs.
  2. Salary deferral contributions (and related earnings) should be returned to the employees. The returned amounts should be reported on Form 1099-R as a taxable distribution not eligible for rollover. Employer contributions (and related earnings) should be returned to you and reported on a Form 1099-R issued to the participant indicating the taxable amount as zero. In addition, any contributions made to the SIMPLE IRA are excess contributions subject to excise tax. For each year there are excess contributions in the SIMPLE IRA plan, you, the employer, are subject to excise tax under Code §4972, and are required to file a Form 5330 excise tax return. In addition, for each year that excess contributions are made to a participant’s SIMPLE IRA, the affected participant may be liable for excise tax under Code §4973 and may be required to file a Form 5329. The excise tax liabilities occur for each year until the excess contributions are removed from the SIMPLE IRA plan.
  • Item 2 is not in the current fix-it guide. That does not mean it is not still a valid corrective action. Maybe because the return of excess conntributions and earnings are a standard remedy or because it is no longer allowed. That is why I suggest professional assistance and not an anonymous response on the internet. My reading is that a return of the SIMPLE IRA contributions and earnings prior to the end of the year would not require any excise taxes.
  • This does not address the harm caused by the tax liability on the earnings. Might this be compensated in a grossed up taxable manner.
  • What was the effective date in the 401k adoption agreement?
  • Good luck cleaninng up this client initiated mess.

Submitted by Brian Devers on Mon, 2018-08-13 18:44

1. 401k plan was just adopted in July, 2018. 2. Assume you mean SIMPLE SALARY DEFERRAL CONTRIBUTIONS (and related earnings) should be returned to each respective employee.These amounts should be reporedt on Form 1099-R as a taxable distribution not eligible for rollover. Employer contributions (and related earnings) should be returned to the client’s (employer’s account) I ASSUME since THIS YEAR’s CONTRIBUTIONS are being returned THIS YEAR – excise taxes will not be relevant or due. Earnings are taxable to each respective employee on this year’s contributions (which are being returned) Regarding the tax liability on the earnings — employees can still defer more this yearemployer could bump up the profit sharing cotnribution a bit to make up.Appreciate the response and help.

Submitted by William Tuttle on Tue, 2018-08-14 05:25

  • My post was for informational and recreational purposes only
  • I am not a retirement plan specialist.
  • I simply provided a “possible” corrective action that is NOT in the current IRS SIMPLE IRA fix-it guide.
  • In both the title and content I strongly cautioned that professional assistance was required.
  • It is irresponsible to take such action without verifying that it is correct.

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