We recently took over a client that has a 401(k) Plan. We found out after the fact that the owner's spouse own's a separate company and sponsors a Simple IRA. They have minor aged children which makes them a controlled group. They were told by their prior TPA that this was allowed since when tested together, they passed 410(b) and 401(a)(4). Is this OK, or is my client prohibited from having a 401(k) and must he also provide a Simple IRA? If the 401(k) was not allowed, what do we do to bring them back into compliance?

Check IRC 1563(e)(5) ...for corporations

Your client is not prevented from having the 401k because his wife's business has the SIMPLE IRA plan. Rather, it is the wife's business that cannot have a SIMPLE IRA for a year that her husband's business had or has a 401k. IRC 408p.

It's the SIMPLE IRA that needs to be undone. That would require re-doing tax returns and W-2s, to eliminate the claimed deductions.

Implications to your client's 401k grow out of the fact that his wife has a business, and presumably employees. They have to be taken into account in the nondiscrimination and minimum coverage testing of your client's 401k. That might cause your client's 401k to be disqualified.

As for the prior TPA's position that the 401k could be combined with the the SIMPLE IRA, it can't because there are no proper SIMPLE IRA accruals in the same year that the 401k existed. Barring that, I'd suspect that the 401k plan does not provide, in its documents, that it is permissively aggregated with the SIMPLE IRA.