SIMPLE with No NHCE?

[justanotheradmin]

I was watching the ERISApedia webinar on the SECURE Act questions - and Ilene mentioned that in order to sponsor a SIMPLE IRA, an employer must cover / have a NHCE. 

Does anyone have a cite for this? 

I have never heard that particular rule, but I don't work with SIMPLE IRAs, so I'm sure there is lots I don't know. 

I thought a sole proprietor with no employees could sponsor a SIMPLE IRA, but maybe I'm mistaken. 

[Larry Starr]

I wasn't paying close attention to the webinar, so I didn't catch that statement.  I believe you are NOT mistaken.  A sole prop can set u a SIMPLE if desired (to the best of my knowledge).

 

 

[justanotheradmin]

Thanks Larry. it was in the automatic enrollment tax credit section. I believe she was on slide 43 when she mentioned it. Could be I mis-heard or mis-understood. 

I understand in order to be eligible for that credit the employer has to be eligible to sponsor a SIMPLE. And if I understood correctly, she mentions that one of the criteria to sponsor a SIMPLE is they have to have a NHCE.

Maybe I misunderstood and she just meant to say in order to be eligible for that particular credit the employer has to have a NHCE (which would narrow the group of employers). I don't think the criteria is they have to be eligible to sponsor a SIMPLE AND have at least NHCE. 

Maybe it's related to the fact that to be eligible it has to be an EACA (not just an ACA)? I don't see why an HCE only plan couldn't have an EACA? Maybe there is some rule that says in order to be an EACA the employer has to have at least one NHCE? Do you know of one? Anyone else? I've not hear of one, but most the plans I deal with either have no auto-enroll, or they have a full QACA. 

The reason I ask is because we've already had several inquires about HCE only (usually one participant ) plans wondering if they can amend to add an EACA to get the tax credit. I don't see why not unless there is something I'm missing about the rules. What do folks think? 

[Bill Presson]

42 minutes ago, justanotheradmin said:

Thanks Larry. it was in the automatic enrollment tax credit section. I believe she was on slide 43 when she mentioned it. Could be I mis-heard or mis-understood. 

I understand in order to be eligible for that credit the employer has to be eligible to sponsor a SIMPLE. And if I understood correctly, she mentions that one of the criteria to sponsor a SIMPLE is they have to have a NHCE.

Maybe I misunderstood and she just meant to say in order to be eligible for that particular credit the employer has to have a NHCE (which would narrow the group of employers). I don't think the criteria is they have to be eligible to sponsor a SIMPLE AND have at least NHCE. 

Maybe it's related to the fact that to be eligible it has to be an EACA (not just an ACA)? I don't see why an HCE only plan couldn't have an EACA? Maybe there is some rule that says in order to be an EACA the employer has to have at least one NHCE? Do you know of one? Anyone else? I've not hear of one, but most the plans I deal with either have no auto-enroll, or they have a full QACA. 

The reason I ask is because we've already had several inquires about HCE only (usually one participant ) plans wondering if they can amend to add an EACA to get the tax credit. I don't see why not unless there is something I'm missing about the rules. What do folks think? 

JAA,

I asked Ms Ilene to clarify. She was just talking about the credit. Here's her response.

 

Section 45E of the Code (which controls the Credit) says:

 

(1) In general

The term "eligible employer" has the meaning given such term by section 408(p)(2)(C)(i).

BUT:

Section 45E(c)(d)(1)(B) (which discusses the definition of Qualified startup costs) says:

(B) Plan must have at least 1 participant

Such term shall not include any expense in connection with a plan that does not have at least 1 employee eligible to participate who is not a highly compensated employee.

So, while a plan covering just an owner or just HCEs is technically eligible for the credit, there are no expenses that qualify for the credit.

This provision was in the law before SECURE.

Sorry ….

 

[justanotheradmin]

thanks Bill!

Does that same definition of qualified startup cost apply to the EACA credit?

Sec 45T does mention the "eligible employer" as defined in 408(p)(2)(C)(i). but it doesn't seem to reference the definition of Qualfied startup cost from 45E, probably because the EACA credit isn't dependent on actual costs (unlike the startup credit, which do require actual costs). 

[justanotheradmin]

Scenario A

I'm imagining a scenario where a one participant plan (HCE only) spends $200 on a plan amendment to add EACA and gets a $500 credit for 3 years. 

Or scenario B, where a two person plan sponsor (one HCE, one NHCE) spends $200 on a plan amendment to add EACA (and no other costs) and gets a $500 credit for 3 years. 

 

Because the EACA credit isn't tied to "Qualified startup costs" wouldn't Scenario A still qualify for the EACA credit? 

A separate question: is the EACA credit limited to actual costs? I don't do business taxes so I don't know how the General Business Credit under section 38 works. I'm guess it probably is? As long as business costs over all are over $500 it might still apply? Or would plan specific EACA costs have to be $500 each year to get the full credit? Either way, that really isn't my question. I'm hoping for clarification on my one participant EACA credit question. 

[AKconsult]

The employer does not need to have a NHCE to set up a Simple; however, 45E does require the employer to have at least one NHCE in order to qualify for the startup cost credit.

In scenario A above, I don't see any reason why a one participant plan that adds an EACA wouldn't be eligible for the credit.  As long as it meets the definition of Eligible Employer and the plan is a qualified employer plan under 4972(d) and the automatic arrangement meets the requirements of 414(w)(3), then I don't see what would prevent the employer from taking the credit.   I hadn't really thought of a one-participant plan doing that, but I don't see anything that would prohibit it.

[justanotheradmin]

@AKconsult that is my conclusion as well - but the various webcasts on the SECURE act don't seem to agree with me. I think the presenters are confusing the two credits - and from what I can tell, they are apples and oranges. Just because an employer isn't eligible for the start-up credit doesn't mean they are also ineligible for the EACA credit. The two aren't linked or dependent on each other, the qualifiers aren't the same.