Question 264: What happens when one member of a controlled group has a profit-sharing plan and the other member has a SIMPLE (either 401k or IRA) plan? I thought an employer cannot sponsor a SIMPLE and a qualifed plan; how would aggregation apply to this controlled group situation?
Answer: Work? It doesn't. Let me explain. In doing so, I will refer to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)

This is perhaps the most important thing to understand about the controlled group ("CG") rules: CG members are treated as though they were one employer. This is true for qualified plans. (See WTE 10:01.) It also is true for SEPs (sSee WTE 10:28) and for SIMPLEs (ee WTE 10:29). Most often, if you treat controlled group members as though they were 2 divisions or branch offices of a single employer, you will arrive at the correct answer.

So let's rephrase your question. Suppose you had an employer that sponsored both a SIMPLE IRA and a profit-sharing plan. The SIMPLE IRA only covers employees in the Azusa office; the profit-sharing plan covered employees in the Cucamonga office. What would that mean?

It surely would mean the IRA arrangement does not satisfy the rules of a SIMPLE IRA or a SIMPLE 401(k). If any group member (or division of a single employer) sponsors a qualified plan, then no other group member (or division of a single employer) can sponsor a SIMPLE arrangement. IRC �408(p)(2)(D), IRC �401(k)(11)(C).

What about the qualified plan? It needs to be tested under the minimum coverage rules taking into account the employees of all group members. If the group is using the general test for nondiscrimination purposes, then all nonexcludable employees of all group members are considered in that test.

One of the things I like best about SunGard Corbel's upcoming set of Who's the Employer workshops is that we will have the time to explore in detail the consequences of controlled group and affiliated service group status. Sometimes it takes so long to explain what is a controlled group that I don't have the time to explain what it means and why it's important. The half-day format will give us time to teach this important concept in depth.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.