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Can an owner immediately start a SIMPLE plan after terminating a profi


John A
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A small employer (less than 10 employees) sold her business in an asset sale. The owner is continuing as a consultant under the same name. The plain vanilla profit sharing plan was terminated at the same time the business was sold, and all participants were paid. Can the owner immediately start a SIMPLE plan?

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  • 2 weeks later...
Guest Paul Leslie

I wouldn't recommend it. The rules for Simple IRA are that the employer can not have any other plans. According, to the IRS that business never terminated if there was only an asset sale. Plus if the business owner was a sole proprietor, I'm not sure if the IRS would take the position that the sole prop. is one business regardless of the number Schedule C business reported on the tax return.

The IRS does that with a lot other things in the tax code. Plus the a sole propreitor's income for a simple IRA is based on all of the business subject to SE tax not just the business that established the business.

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Guest Paul Leslie

There would not be any problem with doing that as long as she does not own more than 50% in any other business ventures that have a qualified plan.

I don't know anything about your client's situation but if she will net more than 50K a SEP plan could have the potential to allow her to contribute more than a simple plan. Watch out if she ever plans to having other employees, she would have to make contributions on behalf of them once their eligable. She probably is well aware of this having had a profit sharing plan.

A simple would only require the matching portion, so the employer is on the hook for less money. One point on this matching, she has to do matching for herself so she can contribute more 6K because of having to contribute 3% of her compensation. The absolute most that she could put away would be 12k (6K of her own money & 6K the business' matching portion 120K x 3%).

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  • 3 weeks later...

".....Plus the a sole propreitor's income for a simple IRA is based on all of the business subject to SE tax not just the business that established the business."

I don't entirely agree with the above statement unless the businesses/employers are treated as one employer under Code Section 414. For example, earned income from an unrelated partnership can not be counted (see following). While there is no cite directly on point and IRS guidance seems to suggest that you may be right (and Code Section 401© does not apply), I do not feel that ALL earned income can be counted. I also feel that an individual that files long schedule SE can also have a SIMPLE (but may have to adjust NESE if there are unrelated gains/losses or if there is W-2 income involved). Agin, the rules and the law is not all that clear and future "clarifications" may be enacted (as of the date the law became effective). Thus, I'd excercise some caution or get a PLR. If you have any additional info on this point, please share it with us.

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Guest Paul Leslie

That is very interesting point that you brought up. When I wrote that I was taking a much more simple approach.

My thought was I have Schedule C1 with $50,000 profit and different business Schedule C2 with $50,000 loss. I can't set up Simple in Schedule C1 because it made money.

But you are right SE income can come from many other sources, so the rule is if you own business use a pension specialist for your retirement plans.

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