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Case of the Week: Terminating a Simple IRA Plan Mid-year

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in California is representative of a common inquiry involving savings incentive match plans for employees (SIMPLE) IRA plans. The advisor asked:

"I have a client who maintains a SIMPLE IRA plan, but is thinking of changing to a 401(k) plan. Could he terminate the SIMPLE IRA plan mid-year and start a 401(k) plan?"

Highlights of Discussion

  • No, he would not be able to terminate the SIMPLE IRA plan mid-year. The IRS’ rules state that businesses that sponsor SIMPLE IRA plans must maintain their SIMPLE IRA plans on a whole calendar-year basis (except for the initial year of establishment, which may be a shortened plan year). See IRS Notice 98-4 for detailed rules.

  • Once started, a sponsor must continue his or her SIMPLE IRA plan for the entire calendar year, funding all contributions as promised in the employee notice.

  • A sponsor may terminate his or her SIMPLE IRA plan prospectively, beginning with the next calendar year, but only after informing participants within a reasonable time before the election period that there
    will be no SIMPLE IRA plan for the upcoming year.

  • The IRS has defined “a reasonable time before the election period” as at least one day before (i.e., by November 1 for the 60-day election period that begins November 2).

  • Your client need not give any notice to the IRS regarding the termination of the business’s SIMPLE IRA
    plan.

    Example

    In 2013 Sam’s Small Company decides to terminate its SIMPLE IRA plan as soon as possible. Sam must
    inform its employees by November 1, 2013, that there will be no SIMPLE IRA plan for 2014. For 2014,
    Sam is free to establish and maintain another kind of qualified plan for the company’s employees.

    Conculsion

    While a SIMPLE IRA plan sponsor has the ability to terminate the plan, the termination must occur on a
    prospective basis. Financial advisors who are aware of the rules for plan termination for all plan types
    are better positioned to support their clients.

    The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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