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Multiple Plans Coordination in General


Guest SteveHample
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Guest SteveHample

Several questions in the SEP/SIMPLE thread ask about having more than one plan in a year. I encounter the question of coordination between SEP/SIMPLEs and the 401K 403b arena as well and could use general philosophical guidance.

Some common questions.

Fred divides his basket business into basket weaving and basket marketing to create two SEPs and maxes out on both. (This would seem prohibited because a controlled group rule would aggregate Fred's contributions under one limit.)

George who is seasonally employed (teacher, snow plow operator in Buffalo NY) participates in the employer's 401k or 403b plan during the winter and successfully guides canoe trips in the summer as a sole proprietor or sole owner of an LLC or Sub S . Is there anything to prevent George from creating a SIMPLE or SEP for the canoe business and contributing the maximum under that plan for his summer work?

Harriet the hard working realtor is an idependent contractor with a SIMPLE plan. Late in the year she lands the sale of a lifetime and decides to drop the SIMPLE as of Nov 1 and start a SEP to defer as much as possible from a year end $200,000 commission. Anything to prevent Harriet defering the SIMPLE maximum on her early in the year $50,000 of earnings PLUS the maximum SEP on the year end $200,000 earinings?

( Tom Poje on another board advises a SIMPLE must be the exclusive plan for the year and that if a qualified plan is established after the SIMPLE plan is funded, the SIMPLE is invalidated and contributions must be returned by the due date of the employee's tax return. This particular question is cited in The ERISA Outline Book as well - 2001 edition , page 12.21

Remember, the exclusive rule for SIMPLEs includes 403(B)s, 457s and SEPs as well. )

Does the prohibition against double dipping of contribution maximums arise only in contolled group situations as with Fred and Harriet? Is George OK in what he is doing? Is there a consistent overall philosophy that controls such situations?

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Fred divides his basket business into basket weaving and basket marketing to create two SEPs and maxes out on both. (This would seem prohibited because a controlled group rule would aggregate Fred's contributions under one limit.)

AGREED. IRC 414(B) & ©/1563

George who is seasonally employed (teacher, snow plow operator in Buffalo NY) participates in the employer's 401k or 403b plan during the winter and successfully guides canoe trips in the summer as a sole proprietor or sole owner of an LLC or Sub S . Is there anything to prevent George from creating a SIMPLE or SEP for the canoe business and contributing the maximum under that plan for his summer work?

NO, but the 415 limt (100%/$40,000 for 2002) would apply if George owned more than 50 percent of both businesses. The elective contributions to all plans George participates in would be limited to the 402(g) limit ($11,000 or $11,500 fore 2002). In both cases, even if the entities were not "controlled / related / affilliated." The 402(g) is an individual limit. Elective contributions under 457(B) plans are NOT mentoned in 402(g) and are are based on includible (taxable) compensation.

Harriet the hard working realtor is an idependent contractor with a SIMPLE plan. Late in the year she lands the sale of a lifetime and decides to drop the SIMPLE as of Nov 1 and start a SEP to defer as much as possible from a year end $200,000 commission. Anything to prevent Harriet defering the SIMPLE maximum on her early in the year $50,000 of earnings PLUS the maximum SEP on the year end $200,000 earinings?

YES & NO. Simple compensation is based on the amount earned for the full year. If she starts another plan for any part of 2001 and accrues any benefit in respect to her service in 2001 her SIMPLE compensation is an excess and should be treated as regular "wages" for all purposes. Amounts reported on Form W-2 box 1, should NOT also be reported in box 13. The amount sd be removed by Harriet by April 15, 2002 (generally) along with any gain attributable to the excess.

( Tom Poje on another board advises a SIMPLE must be the exclusive plan for the year and that if a qualified plan is established after the SIMPLE plan is funded, the SIMPLE is invalidated and contributions must be returned by the due date of the employee's tax return. This particular question is cited in The ERISA Outline Book as well - 2001 edition , page 12.21

Remember, the exclusive rule for SIMPLEs includes 403(B)s, 457s and SEPs as well. )

AGREED, but an employer can not cause an amount to be distributed. To avoid the nondeductible excess tax the excess amount sd be treated as "wages" on Form W-2.

Does the prohibition against double dipping of contribution maximums arise only in contolled group situations as with Fred and Harriet? Is George OK in what he is doing? Is there a consistent overall philosophy that controls such situations?

CONSISTANCY IS THE HOBGOBLIN OF PETTY MINDS; of course not!

Hope this helps.

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