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Termination of Simple IRA -- How does story end?


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Buyer maintains a 401(k). In April of 2008, it will acquire Seller, the sponsor of a Simple IRA. I've read 408(p)(10) and understand (I think) about the transition period permitted with respect to the Simple IRA. I've also seen some discussion about the fact that Simple IRAs must generally be maintained for a full year. But does that rule still obtain in an M&A setting? Would the Simple really have to be maintained through year-end 2008 on side-by-side with Buyer's 401(k)? If the Simple IRA were a 401(k), it could be terminated on the eve of closing, so that Buyer could get on with life and have all its employees in the same plan immediately. Why should the result be different with a Simple IRA? And if Buyer does have to maintain the Simple IRA through year-end 2008, how does that impact its 401(k) testing??

Would love it if anyone wanted to share their thoughts about most common way of handling this situation. I need to know how this story ends!

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The main reason is that that would leave Sellers' employees w/out any plan from 1/1/08 until after transaction closes in April. Also, there seems to be informal guidance out there that suggests that now that we are inside 60-day period for decisionmaking re the 2008 plan year, it may not be possible to terminate.

Thanks.

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  • 1 month later...

I have the same issue.

Is there any clear answer or guidance on whether an exception to the general rule exists to permit termination of SIMPLES mid-year when Buyer simply wants to shift all acquired employees over to its 401(k) Plan?

Even if there is no clear answer, I would welcome confirmation of that so I can stop searching. Many thanks.

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A special transitional rule allows an e/er to maintain a QP and a SIMPLE IRA at the same time because of an acquisition, disposition, or other similar transactions. The special rule provides that the simple IRA will be treated as a qualified salary reduction arrangement for the year of the transaction and the following year. See IRC Sec. 408(p)(10)©.

Mid-year termination of a SIMPLE-IRA/401(k) is not a viable option.

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A special transitional rule allows an e/er to maintain a QP and a SIMPLE IRA at the same time because of an acquisition, disposition, or other similar transactions. The special rule provides that the simple IRA will be treated as a qualified salary reduction arrangement for the year of the transaction and the following year. See IRC Sec. 408(p)(10)©.

Mid-year termination of a SIMPLE-IRA/401(k) is not a viable option.

Gary,

Many thanks for this response. That was the conclusion I was reaching based on the § 408 language.

Curious though if there is some clear policy rationale for this requirement. In our particular case, at least, the company contributions under the Buyer's qualified plans will be greater than benefits under the SIMPLE. Buyer does not intend to provide double coverage to the acquired employees though if it has to continue the SIMPLE. As such, end result appears to be that the acquired employees will generally get less benefits than they would have if permitted to immediately come into Buyer's plans and Buyer will have to take special steps to amend its existing plans to exclude these acquired employees while still covered under the SIMPLE---unless there is some provision I am missing that would automatically exclude coverage of participants in SIMPLE for the transition period. (I guess I should know better than to believe the IRS when they label something SIMPLE.)

Another question. I'm assuming that just because the transition period lets you continue for the transition year plus the next year that you are not obligated to do so if you prefer to terminate the SIMPLE at the end of the transition year?

Thanks.

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  • 3 weeks later...

In looking through 2006 IRS Publication 560 (pg 9), it appears as if you have the year of the transaction plus the two following years to correct acquisition issues: i.e. >100 employees or more then one plan due to acquisition. Is that correct? Gary's post seems to indicate that they only have one year.

For example, if as the result of an acquisition in 2007, the controlled group which originally had just a SIMPLE IRA now has both a 401(k) as well as the SIMPLE IRA, when must this be corrected by 2008 or 2009?

As always, thanks for your assistance - I'm out of my comfort zone here...

PAL

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  • 4 weeks later...

A very helpful thread as I now find myself facing this situation as well.

I understand that the SIMPLE IRA of the acquired company must continue for the remainder of the calendar year of the acquisition, but would that prohibit participants in the SIMPLE IRA from also participating in the acquiring company's 401(k) plan? If I understand the acquisition exception to the "only plan" rule, an employer can make contributions to a SIMPLE IRA even though it maintains another plan if (i) an acquisition occurs, (ii) the "only plan" rule would have been satisfied if the acquisition had not occurred, and (iii) only individuals who would have been employees of the target are eligible to participate in the SIMPLE IRA.

The "only plan" rule appears to affect only the SIMPLE IRA and have no affect on the 401(k). Assuming the acquiror wants to kill the SIMPLE IRA at the end of the year, could the acquiror allow the target company's employees to participate in both its 401(k) plan and the SIMPLE IRA for the remainder of the year? Or, could it allow any target employees who cease their deferrals into the SIMPLE IRA to participate in the 401(k)?

As long as none of the acquiror's employees are allowed into the SIMPLE IRA, I don't see anything that would prevent the acquiror from doing this. Am I off base?

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  • 2 weeks later...
A very helpful thread as I now find myself facing this situation as well.

I understand that the SIMPLE IRA of the acquired company must continue for the remainder of the calendar year of the acquisition, but would that prohibit participants in the SIMPLE IRA from also participating in the acquiring company's 401(k) plan? If I understand the acquisition exception to the "only plan" rule, an employer can make contributions to a SIMPLE IRA even though it maintains another plan if (i) an acquisition occurs, (ii) the "only plan" rule would have been satisfied if the acquisition had not occurred, and (iii) only individuals who would have been employees of the target are eligible to participate in the SIMPLE IRA.

The "only plan" rule appears to affect only the SIMPLE IRA and have no affect on the 401(k). Assuming the acquiror wants to kill the SIMPLE IRA at the end of the year, could the acquiror allow the target company's employees to participate in both its 401(k) plan and the SIMPLE IRA for the remainder of the year? Or, could it allow any target employees who cease their deferrals into the SIMPLE IRA to participate in the 401(k)?

As long as none of the acquiror's employees are allowed into the SIMPLE IRA, I don't see anything that would prevent the acquiror from doing this. Am I off base?

Scott, In another thread titled "SIMPLE IRA Plans and the merger exception -- can the employees of the S", Gary Lesser suggests in a post dated Sep 15, 2000, that the employees of the original SIMPLE IRA could not participate in the 401(k). He also says that there may be a problem in not covering all eligibles in the SIMPLE if that it is done.

Like you, I am feeling my way along here, but my instinct is that if Buyer is required to maintain the SIMPLE IRA through year-end, the thing to do is as JHALL suggests -- simply keep everyone in the plan they were in just prior to closing until the SIMPLE IRA can be terminated. I do think that would require amendments to Buyer's plans, though, to carve these folks out. Have to think through the testing implications of that for those plans, though, I suppose.

FWIW, H.R. 5160 introduced January 29, 2008 contains a provision that would appear to allow mid-year SIMPLE IRA plan terminations were it enacted.

PAL, I see what you see on p.9 of Pub 560. That appears consistent with IRC 408(p)(10)©, which says transition period ends "on the last day of the second calendar year following the" one in which closing occurs. (It looks like the one-year business was in old IRC 408(p)(2)(D)(iii)(II) (stricken by PL 105-206 according to my CCH), which sent you to 410(b)(6)©).

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What if we were to (1) continue the SIMPLE IRA for the remainder of the year, so that those of Seller's employees who want to can continue to participate, but (2) allow those who cease contributions under the SIMPLE IRA to come into the Buyer's 401(k)? In essence, they'd have a choice. Anyone see any problems with that?

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Why wouldn't termination on or before 12/31 still be possible? After 12/31 the Simple IRA plan can only be amended for the current year if it does not change the provisions of the 60-day notifications; otherwise the amendment is effective the following year.

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Many thanks, Gary. I think we're on the same page in terms of taking steps on or before the 60-day period that begins November 1, 2008 to terminate the plan effective as of 12/31.

What I'm wrestling with is how to handle the two plans (Seller's SIMPLE IRA and Buyer's 401(k)) between now and then. Seems it might be simplest to keep everyone in the plan they are currently in until the SIMPLE IRA is terminated. Is that what you commonly see in these situations?

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