It has taken countless hours (and dollars) at the Labor Department, the Internal Revenue Service and the Small Business Administration and they still haven't resolved a little problem that could squash a tiny firm in Clarendon Hills, Ill.

The subject is the Employee Retirement Income Security Act of 1974, known inelegantly as ERISA and criticized regularly as being beyond the comprehension and legal skills generally available to a small business. It's another story of how well-intentioned legislation sometimes gets in the way of common sense.

The International Reserve Equipment Co. of Clarendon Hills is owned by the Mertz brothers, Bob, Bill, George and Tom, and specializes in handling used processing equipment. Five years ago, the Mertzes started a profit-sharing and pension plan for themselves and their lone employe. In 1977--on the advice of their attorney, they say--the brothers sold the company's building to the pension plan trust fund for $117,000 to protect that asset in case the company were sued.

But the sale violated Section 406 (A) of ERISA, an explicit prohibition against transactions between a corporation and its pension trust fund. The $300 monthly rent the corporation began paying the trust fund for the use of the building was similarly prohibited, because the rent was established by the corporation, not by an independent party looking out for the interests of the pension plan.

The facts the trust fund gained considerably from the transaction (primarily because the building appreciated) and that the only members of the pension plan were the four brothers and one employe (who subsequently left the firm with a $13,000 check from the pension fund) make no difference under the law.

ERISA was set up in the first place to make sure people don't get hurt. There had been too many cases of employers' frittering away the pension fund and employees' discovering at age 65 that all the retirement income they had expected wasn't there. So ERISA has all kinds of protections to make sure that pension funds are properly managed and that pension fund assets are not mixed with those of the employer.

As frequently happens, the Labor Department discovered the Mertz situation through an IRS audit. The Mertzes responded by formally applying to Labor for an exemption to the prohibited transaction, one of 2,500 such applications Labor gets every year. If the exemption is not granted, two things happen: the violator must pay a 5 percent excise tax on the total dollars in question, and if the violation is not corrected, the violator must pay a 100 percent excise tax.

Without an exemption, the only way International Reserve's pension plan could correct the violation would be to sell the building. If it cannot be sold within a 90-day period, then the 100 percent tax penalty against the corporation would kick in. Because of the 90-day requirement, the building might have to be sold at a loss to avoid a prohibitive penalty. Thus, the Mertzes claim, the lack of an exemption could bankrupt them.

"The Mertzes are basically right about one thing," said Howard D. Hensley, chief of Labor's exemptions division. If the problem isn't worked out, "they are going to be destroyed."

Before the Mertz brothers visited the department two years ago for their first hearing on their case, "We just started calling people in Washington, everybody we could," Bob Mertz recalled. "None of us had ever been to Washington before."

One of their phone calls was referred to Jerry Lawson, a GS14 in the Small Business Administration's office of advocacy, which is charged by Congress with representing small businesses before other federal agencies "in the same way Labor is the advocate for labor and Commerce for large business," in Lawson's words.

Lawson, who is not a lawyer, agreed to go to the meeting with the Mertzes and did an effective job of "arguing his heart" if not the law, according to Hensley. From his vantage point, Lawson was shocked by what he heard. So he made calls for the brothers and kept in touch with them.

Despite his efforts, the Labor Department initially ruled against the Mertzes. Lawson switched into high gear and the Mertzes hired heavyweight legal counsel specializing in ERISA matters. The lawyers are preparing a new application for an exemption and have received some informal signs from Labor that, if certain conditions are met, the application will be favorably received. The Mertzes and Lawson have been able to generate a flood of letters to Labor from everyone from the Clarendon Hills Chamber of Commerce to important members of Congress, all supporting the firm.

"Our sole concern is the interests of the pension plan and the plan participants," said Labor's Hensley. "I kind of feel sorry for them, but we take the view that ignorance of the law is no excuse."

"Admittedly, we took some wrong advice," said Bob Mertz. "But we're not attorneys; we don't speak that language. And no one got hurt; everybody benefited."