SIMPLE IRA

[BentoBox]

I'd love some feedback on the following scenario to see if I'm thinking about this correctly.   

Company A (which maintains a 401k plan) and Company B (which maintains a SIMPLE IRA) intend to create a JV.  Company A will hold less than 80% interest in the JV after the transaction.  Company B's employees will be transferred to Company A in connection with the transaction and become employees of Company A.  The intent is to offer Company A's 401k plan to the former employees of Company B (who participated in the SIMPLE IRA) immediately after close.  Post-closing the SIMPLE IRA will continue to be maintained by the JV or Company B.  I'd appreciate any thoughts on the following:

• Do you see any issue with offering former Company B's employees who become employees of Company A in connection with the transaction the ability to participate in Company A's 401k plan immediately after close?  Post-closing Company A will not be in a controlled group of corporations that includes the JV or Company B.  I'm assuming that the transaction will trigger a separation from service for former Company B's employees that come over to Company A.
• Will the entity that maintains the SIMPLE IRA (either Company B or the JV) have an obligation to fund elective deferrals and employer contributions through the end of the calendar year for the employees who terminate with Company B and transfer employment to Company A? 
• If the JV/Company B do not have any employees post-closing would they be able to dissolve the SIMPLE IRA mid year?

    Thanks for any guidance you can provide.  I'm not fluent in SIMPLE IRAs/408(p) and want to ensure I'm not missing something.

 

 

[EBECatty]

With the caveat that this will be a transaction-specific determination on a number of issues, a few off-the-cuff thoughts:

• I assume A and B are not affiliated pre-JV. I would double-check the stock exclusion, attribution, affiliated service group, and management services group rules to make completely sure they are not affiliated post-JV. It wouldn't surprise me if they formed an ASG post-JV. 
• Assuming A and B are not affiliated at any time, pre-JV or post-JV, then I think B's employees moving to A are, for purposes of A's 401(k) plan, new hires who can participate in the 401(k) plan right away (assuming eligibility and entry dates are satisfied). If that's the case, I agree they will have a separation from service with B. The former B employees' post-closing 401(k) deferrals will be capped taking into account their pre-JV SIMPLE deferrals; they don't get to fully double up.
• Whoever maintains the SIMPLE will need to make sure all deferrals and employer contributions are funded for all periods during which B's employees worked for B (i.e., pre-JV). If B's employees are no longer employed by B post-JV, there would not be any obligation to continue making SIMPLE deferrals or employer contributions on the basis of those employees' post-JV pay from A.
• If all of B's employees are terminated, functionally the SIMPLE IRA ends. But, technically, I don't think the SIMPLE IRA can terminate until 12/31. Terminating a SIMPLE IRA doesn't have much significance, so usually this is a non-issue.
• Remember the two-year rollover limitation for SIMPLE IRAs before everyone tries to roll over their SIMPLE IRA to A's 401(k). 

[BentoBox]

@EBECatty -  Thank you for such a thorough response and flagging the ASG question, which I've been wondering about myself.  This makes alot of sense. 

 

[BentoBox]

Here's another hypothetical I've been thinking about:   Company A sponsors a 401k plan and purchases 100% of the stock of Company B who maintains a SIMPLE IRA.  All of Company B's employees terminate employment with Company B as of closing, are transferred to Company A, and became immediately eligible for Company A's 401k plan.  Company A/B argued that the SIMPLE IRA "functionally terminated" as of closing because all of Company B's employees terminated employment with Company B.  Company A/B did not allow the former participants to continue to make SIMPLE IRA contributions through 12/31 nor did Company A/B fund the remaining post-closing employer contributions through 12/31.  Company A/B then terminated the SIMPLE IRA as of 12/31. 

I'm not so sure that this gels with 408(p)(10), the SIMPLE IRA M&A transition rule.  By my read, 408(p)(10)(A)(ii) requires that Company B (regardless of whether it was merged into or continued as a wholly owned sub of Co. A) should have continued salary reduction and /er contributions to the SIMPLE IRA through 12/31.   

In other transactions I have worked in with the stock purchase scenario, we have allowed the former SIMPLE IRA participants to continue to make elective and employer contributions to the SIMPLE IRA post closing (even if they transferred employment to the acquiring entity in connection with the transaction). 

Any thoughts? 

[Bird]

So you're saying that Company A should allow the former Company B employees to contribute to the B plan from their A compensation? No, I don't think so. (I think) the transition rules are for a scenario where A buys B and B continues payroll.

[BentoBox]

Yes, that's exactly what I'm trying to confirm.  In other deals, we have had employees contribute to the B SIMPLE IRA from their A compensation (and have set up a manual process in which the SIMPLE deferrals are withheld from A compensation and contributed to the SIMPLE IRA).  Section 408(p)(10) provides that the only way an employer (meaning the entire controlled group) is permitted to maintain both a SIMPLE IRA and a 401k plan is if "the qualified salary reduction arrangement maintained by the employer would satisfy the requirements of this subsection after the transaction if the employer which maintained the arrangement before the transaction remained a separate employer."  It's clear that if the seller continues as a sub and the employees continue their employment with seller post-close, seller would be required to have employees continue their deferrals.  I guess it's not so clear, at least to me, that if the seller's employees come over to the buyer's payroll in connection with the transaction whether salary reduction contributions must continue to 12/31.  Is this a grey area or am I being overly conservative? 

 

[EBECatty]

Interesting question, and one I haven't encountered before so never gave it much thought. I agree the rules as written are not as clear as they could be in this regard.