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New SIMPLE Plan


Guest rgorman
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Guest rgorman

I have a restaurant client and need to clarify the 100 employee rule.

From the publications and FAQs I have read on the IRS website, it was my understanding that the 100 employee count was determined by looking at any employee that had $5,000 the preceding plan year. From posts I am reading, however, I have seen some that have implied the $5,000 does not affect the 100 employee detemination. Can anyone confirm which way it is?

Also, on the exclusive plan rule. The client was part of a multiple employer plan 401(k) but will be sold effective 2/1/09. With the sale, they will set up a new entity and new EIN. Can they then set up a SIMPLE IRA under this new entity even though they had deferrals and match under the prior plan and entity?

Thanks for any clarification.

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All employees, employed at any time during the prior year (including ineligible and unionized employees), are taken into account under the 100-employee limit rule. [iRC 401©(1), 408(p)(4)(A), 408(p)(4)(B)]

More details may be needed regarding your second question. Is this really a new entity or the continuation of the old. What's being sold. The devil is in the details. Are the employers related in any fashion. If truly a new employer (not a sucessor entity), the enity wd appear to be SIMPLE eligible. Elective deferrals wd have to be aggregated by employees to adhere to annual limits. Are there any related or controlled group issues?

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Guest rgorman
All employees, employed at any time during the prior year (including ineligible and unionized employees), are taken into account under the 100-employee limit rule. [iRC 401©(1), 408(p)(4)(A), 408(p)(4)(B)]

More details may be needed regarding your second question. Is this really a new entity or the continuation of the old. What's being sold. The devil is in the details. Are the employers related in any fashion. If truly a new employer (not a sucessor entity), the enity wd appear to be SIMPLE eligible. Elective deferrals wd have to be aggregated by employees to adhere to annual limits. Are there any related or controlled group issues?

With the sale, the new entity would not be a related employer and there would be no control group issue. The new entity is the same as the old except it will have a new name and a new EIN.

Still confused on the 100 employee count issue. The SIMPLE FAQS on the IRS website answers - Can any employer establish a SIMPLE IRA - by stating - SIMPLE IRA plans may be established only by employers that had no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year.

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Rule relates to preceeding calendar year (IRC Section 408(p)(2)©(i)), so the FAQ statement is correct. But, if the plan is in place for at least a year and the employer falls out of the 100-or-less rule, the SIMPLE can continue for 2 more years after the last year meeting the rule (IRC Section 408(p)(2)©(ii)).

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The new entity is the same as the old except it will have a new name and a new EIN.

So, the first business was sold. The stock is all owned by the new purchasers. Sellers took the money and formed a new corporation which is not a legal sucessor to the one that was sold. Assuming this to be true--it seems like there were no employees in the prior year to worry about.

The 2-year rule mentioned by the Sieve would only apply had there been a valid SIMPLE for a year that then went bad (over the 100 limit) in a subsequent year. All employees that were employed at any time during the prior year are counted (regardless of age, union, wages, aliens, and so on).

Hope this helps.

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Gary --

Just wondering . . . If stock of X was purchased by A & B, and then these new owners of X took the assets and transferred them to new entity Y, lock-stock-&-barrel--including employees, and contracts, etc., etc.--and the new owners of X remain the owners of new entity Y, would we truly not have a successor? After all, the A & B are the owners of Y--i.e., they transferred assets from one entity they owned (X) to a new entity that they own (Y).

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  • 3 weeks later...

If X and Y existed at same time they would likely be a controlled group. Yes, a successor too. [see PLR 9336046 "facts and circumstances" and IRC 414)b) and ©]. I assume that X (the former entity) ceases to exist. The IRS has not issued much guidance on the two terms.

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