Chapter 7 — Eligibility

Unlike other qualified plans, SIMPLE plans are not available to all employers. Two conditions must both be satisfied:

The employer must not maintain any other qualified retirement plan during the year the SIMPLE plan is in effect. This includes:

• pension plans (defined benefit),
• profit-sharing plans,
• 401(k) plans,
• SEP-IRAs,
• 403(b) annuity plans, and
• other ERISA-qualified arrangements.

Exception — Collectively Bargained Plans: An employer that maintains a qualified plan solely to cover employees who are members of a collective bargaining unit (and whose retirement benefits were the subject of good-faith bargaining) may also establish a SIMPLE plan to cover employees who are not covered by the collective bargaining agreement.

The employer may establish a SIMPLE plan only if it had 100 or fewer employees who received at least $5,000 in compensation from the employer during the preceding calendar year.

When counting employees for this limit, the employer must include:

• all employees employed at any time during the year — including part-time, seasonal, and temporary workers — regardless of whether those employees were eligible to participate in the SIMPLE plan,
• employees who are covered by a collectively bargained retirement plan and who may not be eligible to participate in the SIMPLE plan, and
• employees of all commonly controlled businesses (see below).

Businesses under common control — including affiliated service groups, controlled groups of corporations, and trades or businesses under common control — are treated as a single employer for all SIMPLE plan eligibility purposes. This means:

• A sole proprietor who owns two separate businesses must combine the employees of both businesses when testing the 100-employee limit.
• A parent company and its subsidiary must combine all employees when determining whether either entity may establish a SIMPLE plan.

This rule prevents a large employer from establishing SIMPLE plans by artificially splitting its workforce across multiple entities.

Employers who maintain a SIMPLE plan for at least one year but subsequently become ineligible — because their employee count exceeds 100 — may continue to maintain the SIMPLE plan for an additional two-year grace period following the last year of eligibility.

• If the employer’s workforce drops back to 100 or fewer eligible employees during the grace period, it may continue to maintain the SIMPLE plan indefinitely.
• If the employer remains ineligible (more than 100 employees) after the two-year grace period expires, no further SIMPLE plan contributions may be made and the plan must be wound down.

A special rule applies when an employer becomes ineligible for a SIMPLE plan as a result of a merger, acquisition, or similar corporate restructuring. In that case, the SIMPLE plan may be maintained for:

• the remainder of the year in which the restructuring occurred, and
• the entire following calendar year.

This transition period allows employees and the employer time to make alternative retirement plan arrangements without abruptly terminating the SIMPLE plan mid-year.