The Complexities of a SIMPLE Solution

Switching to an updated retirement plan is easy enough if you're the boss, but handling employees' accounts is a little trickier

By Karen E. Klein

Q: Can I roll a SAR-SEP plan directly into a new 401(k) plan if I have contributed as an employer to the SAR-SEP this year? Or do I have to use a SIMPLE IRA or something else as an in-between vehicle? --B.E., Phoenix


As of 2002, you may indeed roll your SAR-SEP into a qualified 401(k) plan, thanks to the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The law permits rollovers between most qualified pension plans, IRAs (Individual Retirement Accounts), 403(b)s, and 457 Plans, according to pension administrator and CPA Mark Swedelson, of Goldberg, Swedelson & Associates in Encino, Calif.

Keep in mind, however, that while you may move the funds from your own SAR-SEP, you cannot insist that your employees follow suit. "Once a company funds an IRA -- any IRA -- the money belongs to the participant," Swedelson says. "The only person able to transfer an IRA is the owner of that IRA. An employer generally cannot force participants to roll their funds from a SAR-SEP into the company's 401(k) plan."


  SIMPLE plans replaced SAR-SEPS, which are no longer available to companies unless they were established on or before Dec. 31, 1996. If a company is cash-strapped, Swedelson says, then a SIMPLE IRA is generally the least expensive retirement vehicle. "The contribution requirements are usually less than a 401(k) plan and there are virtually no administrative or reporting expenses," he says.

If you are still weighing your decision to go from SAR-SEP to 401(k), or you hope to persuade your employees to roll their funds over, there are several good arguments for doing so, Swedelson says:

• Pension plans may offer the possibility of greater investment opportunities

• Participants can borrow from a 401(k), where they cannot borrow from an IRA

• The opportunity to put all your retirement assets in one institution simplifies record-keeping and reduces the number of statements you will receive from various IRA accounts

• A 1992 U.S. Supreme Court decision (Patterson v. Shumate) affords qualified plans, like 401(k)s, the greatest protection against creditors, and

•Generally, a company, its owners and its employees can contribute more to a 401(k) than they could contribute to a SAR-SEP.

Have a question about running your business? Ask our small-business experts. Send us an e-mail at, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Before it's here, it's on the Bloomberg Terminal.