Controlled group and SImple IRA

[Tom]

Just met with a client.  There are 4 companies 100% owned by one individual and his spouse. So this is clearly a controlled group.  Since a Simple IRA can only be adopted by one employer (there is no way for a participating employer to sign on), I suppose the only answer here is for each of the 4 companies to set up their own Simple IRAs. 

I was told by an ERISA attorney at one time that a Simple plan is meant to be just that - simple.  and so there is no such thing as a second participating employer.  But separate Simples should work.  

We are a TPA firm and work with k plans.  I assume some of the record keepers will handle SImple IRAs such as American Funds RKD, Hancock, etc?

Comments?

Thanks

 

[John Feldt ERPA CPC QPA]

A SIMPLE automatically covers all of the employers of the controlled group. Check the language in the document about who is considered to be the employer and the language should be found there.

[Larry Starr]

John is correct; the SIMPLE document automatically covers all members of a controlled group.  But that can be problematic (and maybe illegal).  Let's ignore the situation where we have two entities that are 100% owned by the same person.  Let's instead look at a situation where we have two businesses A and B. They are owned by two individuals X and Y.  X owns 51% of A and 49% of B; Y owns 51% of B and 49% of A.

These two entities are controlled as they pass both tests (5 or fewer people own 80% or more; more than 50% is owned identically).

Mr X wants a plan for A and sets it up.  Mr. Y DOES NOT want a plan for B.  MR. X can set up a 401(k) plan for A and it can pass all the nondiscrimination tests (let's just say it excludes HCEs to make the testing easy and obvious).  So far, no problem.

However, if Mr. X adopts a SIMPLE for A, the plan document says it also covers B, even though the majority owner of B does not adopt the plan and does not want a plan and has not adopted a plan and won't pay for a plan.

Under what law can Mr. X force Mr. Y and company B to have a plan? Actually, there isn't any such law.

Let's say Mr. X goes ahead and adopts a SIMPLE and Mr. Y refuses to participate.  What happens?

One argument is that Mr. X must make contributions for Mr. Y's people even though Mr. Y refuses to do so.  Two immediate problems: 1) are those amounts deductible (assuming Mr. X is actually willing to make those contributions out of Company A for Company B employees)? 2) How does Mr. X get access to Company B payroll information if Mr. Y does not want to provide it?

I have always had a problem with IRS language that automatically covers other business entities that have not actually adopted a plan and might want nothing to do with it.  It is quite possibly a constitutional violation IF the IRS were to argue that the plan is a liability of the company that did not adopt it. And it may be a tax problem for the company that did adopt it but has to contribute for employees that are not its employees, as that is not normally a legitimate deduction.

An argument is made that the IRS language makes it a legitimate deduction; that is, as noted. arguable.

Just something else to bother you when you are trying to go to sleep.......... :-)   

[Mike Preston]

I think the rationale is that Mr. X must secure Mr. Y's cooperation if he wants the plan. If he doesn't get that cooperation he can't adopt the plan.  If he does so anyway the plan does not enjoy any tax benefits. Nothing unconstitutional, just bad tax returns (lots of them).

[Larry Starr]

3 hours ago, Mike Preston said:

I think the rationale is that Mr. X must secure Mr. Y's cooperation if he wants the plan. If he doesn't get that cooperation he can't adopt the plan.  If he does so anyway the plan does not enjoy any tax benefits. Nothing unconstitutional, just bad tax returns (lots of them).

I agree that cooperation is needed; but the IRS says it is AUTOMATIC with their language and I say it can't be.  They have to SECURE cooperation.  For example, assume some minority stock holders in Mr. Y's company.  If that company does not take legal action to adopt the plan, they are not part of the plan and no company money can be spent on those benefits without a misallocation of funds to the detriment of the stockholders.  I agree that Mr. X SHOULD NOT adopt the plan (but can't?  IRS says he can, but they are wrong!). If Mr. X adopts the plan, do the employees of Mr. Y's firm have any enforceable rights to money? Why don't the documents have places for additional members of the controlled group to sign on, and barring that, they are not part and the plan cannot be considered "adopted" by any members of the group. If I were the czar, that's the way I would craft the docs.

Just saying that IRS produced a significant problem with their approach and has never (to my knowledge) dealt with these questions.  Years ago I brought  it up with Jim and Dick of IRS fame in our private Q&A prep meetings in DC; they did not want to even talk about it (I think they understood it was a real issue but they did not cause it).  FWIW.