Cancelling a 401K & starting a Simple in the same year

[kpangelinan]

Can one cancel a 401K (with no contributions) within the same calendar year and start/fund a Simple IRA (before the deadlines in October)?

[Roland Slugg]

Maybe

"SIMPLE" retirement plans are covered by Code §408(p), and the relevant portion would seem to be subsection (2)(D) which says, in part, the following:

An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the 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. (Emphasis added.)

I would interpret the phrase "or benefits were accrued" to mean income (or loss) was earned by the 401(k)'s Trust and/or forfeitures were reallocated to any participant(s) in that plan. This probably means that any existing 401(k) plan in which there are participant balances at any time during the year will render an employer ineligible to establish a SIMPLE Plan for that same year. (Code §408(p)(2)(D))

If the 401(k) plan was established during the current year or in a prior year, but no contributions were ever made, then the employer should qualify for a SIMPLE plan, and this should be true whether the 401(k) plan is terminated or not.

The October 15th date mentioned in the OP is correct, but only if the employer's tax return (individual or partnership) is actually extended to that filing date. (Code §404(m)(2)(B))

Finally, since there is already a 401(k) plan in existence, you may wish to look into the possibility of adopting a SIMPLE 401(k) plan. Perhaps the existing 401(k) can be used, presumably after adopting the necessary wording changes, etc. I would see a professional plan administrator for this.

[kpangelinan]

"SIMPLE" retirement plans are covered by Code §408(p), and the relevant portion would seem to be subsection (2)(D) which says, in part, the following:
I would interpret the phrase "or benefits were accrued" to mean income (or loss) was earned by the 401(k)'s Trust and/or forfeitures were reallocated to any participant(s) in that plan. This probably means that any existing 401(k) plan in which there are participant balances at any time during the year will render an employer ineligible to establish a SIMPLE Plan for that same year. (Code §408(p)(2)(D))

If the 401(k) plan was established during the current year or in a prior year, but no contributions were ever made, then the employer should qualify for a SIMPLE plan, and this should be true whether the 401(k) plan is terminated or not.

The October 15th date mentioned in the OP is correct, but only if the employer's tax return (individual or partnership) is actually extended to that filing date. (Code §404(m)(2)(B))

Finally, since there is already a 401(k) plan in existence, you may wish to look into the possibility of adopting a SIMPLE 401(k) plan. Perhaps the existing 401(k) can be used, presumably after adopting the necessary wording changes, etc. I would see a professional plan administrator for this.

Wow, Roland, THANK YOU.....this is very incite-full and very helpful.