Question 50: A client of mine is being told by a salesman that a "SIMPLE IRA" plan can be sponsored by one of my client's corporations even though it would cover only the employees of that corporation, not others under common control. If the common control rules apply, the group has too many employees to be eligible to sponsor a SIMPLE IRA plan. The salesman says the rules have changed. Is that right?
Answer: You are wise to question what the salesman is telling you. The rules are quite specific and have not changed on this point.
IRC Sec. 408(p)(4) sets for the participation requirements that a SIMPLE IRA must meet:
(4) Participation requirements. --
(A) In general. --
The requirements of this paragraph are met with respect to any simple retirement account for a year only if, under the qualified salary reduction arrangement, all employees of the employer who --
(i) received at least $5,000 in compensation from the employer during any 2 preceding years, and
(ii) are reasonably expected to receive at least $5,000 in compensation during the year,
are eligible to make the election under paragraph (2)(A)(i) or receive the nonelective contribution described in paragraph (2)(B).
(B) Excludable employees. --
An employer may elect to exclude from the requirement under subparagraph (A) employees described in section 410(b)(3).
In other words, essentially if someone is an employee making $5000, they must be included unless they are (a) a union employee under a collectively bargained plan; or (b) a nonresident alien without US source income.
So, the only question is, are the employees of these related entities treated as employees of the SIMPLE IRA sponsor? And the answer is yes. IRC 414(b) says, "For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)(C)) shall be treated as employed by a single employer."
So, if you work for a company that is in a controlled group with a SIMPLE IRA sponsor, you are deemed to be an employee of the sponsor. Combine this with the eligibility requirement of 408(p), and you can see that these workers cannot be excluded (unless they make less than $5,000, are union employees, or nonresident aliens).