Controlled Group

[Guest Jim Brennan]

Owner of business A purchases business B

in mid 1999. Business A has a SIMPLE IRA in

place since 1997. Business B has no plan. How are employees of business B treated for eligibility?

Must business B start a SIMPLE in '99?

[Gary Lesser]

Assuming both entities are controlled (e.g., owned 80 percent or more by same 5 or fewer persons), then all employees of A and B are treated as if employed by single employer (and plan should be adopted by b).

[QDROphile]

For a different answer you may want to think about setion 408(p)(2)(D)(iii) of the Internal Revenue Code.

[Gary Lesser]

Are you suggesting that the employees of "B" don't have to be treated as if employed by one employer or just adding some dicta for future years (i.e., 1999 and 2000 in case "B" has a plan or causes the 100 e/ee limit to be exceeded)? IMO the employees of "B" would have to be considered notwithstanding the grace period rules of Code Section 408(p)(2)(D)(iii). [see IRC 414(B), as amended to include a reference to 408(p)]

[This message has been edited by Gary Steven Lesser (edited 11-12-98).]

[QDROphile]

I am suggesting that the acquisition of B does not affect the compliance of A's SIMPLE or B's lack of a SIMPLE until after 2000 (the year following the year of acquisition) assuming that all of the other applicable requirements are met). A can keep its SIMPLE "as is" (no inclusion of B employees) and B does not have to adopt a plan. This would be the result under section 410(B)(6)© if A had a qualified plan that would otherwise fail coverage upon acquisition of B because of the single employer rule.

However, 408(p)(2)(D)(iii) presents an interpretation problem. Does "another such employer" mean only an employer who has maintained a SIMPLE for one or more years? If so, I agree with your answer. The legislative history suggests that Congrees was attempting to create a grace period to prevent a failure when an employer with a SIMPLE and an employer with a qualified plan ended up in the same controlled group. This makes senses, but a literal reading of "another such employer" means the grace period applies only in a transaction with another employer who has a SIMPLE, not another employer with a qualified plan. I suggest that because the literal reading is too narrow, the 410(B) grace rule may simply apply without limitation to situations where both employers have arrangements (SIMPLE or qualified plan). In other words, where one employer has a SIMPLE and one has nothing, the 410(B) grace period still applies (as it does with qualified plans). This is somewhat agressive, because Congress may have intended to provide relief only to protect a "good" employer who has an arrangement and not a "bad" employer who has no arrangement and who should be forced into the SIMPLE immediately. I have no authority other than the bad drafting of the statute and the contradiction with the committee report to support the idea that employer B (who has no arrangement)is treated as separate until the end of the 410(B) grace period.

That is why I said "think about" the exception. The answer is uncertain and should be resolved with assistance of counsel. Your answer is acceptable and safe.

[Gary Lesser]

Your message was clear, concise, and well written. After reading both of the grace period rules under IRC 408(p) [iRC Sections 408(p)(2)©(i)(II) and 408(p)(D)(iii)] I believe that your answer is more correct than mine; that is, B does not have to adopt the SIMPLE plan under rules similar to IRC 410(B)(6)©. I too am concerned, however, by the use of the phrase "another such employer." The reason I am willing to due a _guarded_ 180 degree turn is Notice 98-4 (portions follow).

-------------------cut here---------------

Q. B-3: Can an employer make contributions under a SIMPLE IRA Plan for a calendar year if it maintains another qualified plan?

A. B-3: Generally, an employer cannot make contributions under a SIMPLE IRA Plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA Plan) ...

However, an employer can make contributions under a SIMPLE IRA Plan for a calendar year even though it maintains another qualified plan if either:

(1) The other qualified plan maintained by the employer covers only employees ... covered under a collective bargaining agreement....

(2) The other qualified plan is maintained by the employer during the calendar year in which an acquisition, disposition or similar transaction occurs (or the following calendar year); the requirements of this Q&A B-3 would have been satisfied if the transaction had not occurred (and thus the employer maintaining the SIMPLE IRA Plan had remained a separate employer); and only individuals who would have been employees of that "separate" employer are eligible to participate in the SIMPLE IRA Plan.

Although we are probably _both_ tax lawyers, neither of us are expressing a legal opinion and readers/lurkers should only consider this discussion as one source of information. In other words, they should consult with their own attorney as to whether this discussion answers their particular question and fact pattern. [Personally I think that the quoted phrase was a poor choice of words, and that the quoted matter in the last line of the Q&A was intended to clarify the poor draftsmanship contained in the Code.]

Thank you for participating. Who are you? (qpsep@pixpc.com)