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SARSEP - effect of unsigned original adoption agreement


Guest blaum8
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Guest blaum8

Have an interesting one. Employer "adopted" SARSEP in 1995. Sponsor had a former DBP, so IRS ruling letter was requested for a SARSEP adopted in 1995. Turns out plan sponsor signed everything (POA, IRA, etc.) but the actual adoption agreement for the SARSEP. However, all docs were submitted to IRS and IRS, and IRS issued favorable ruling on the SARSEP.

However, there's many items which suggest that despite the IRS letter ruling, there's no valid plan: To wit:

1) Prop Reg 1.408-7 requires "executed" doc.

2)instructions to 5305A requiring all blanks, including signature space, to be completed

3)document itself specifies "completing and signing"

So issue is, can the ruling letter be relied on, or given the lack of signature on the adoption agreement, do I need to do a VCS filing or CAP filing just be be safe (since the arrangement is still active)? Thoughts anyone?

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Is it possible that a signed agreement was submitted to IRS? Can get copy under FOIA. Was it aproved by PLR or determination letter request? If DLR, was it submitted to IRS in proposed or final form? What does the determination letter say? Were its terms followed? Any caveats on it? Was it approved or withdrawn? Can you send me copy of determination letter (fax 317.254.0386)

Without an executed agreement there is no plan. Corrective procedures do not apply to a plan that does not exist.

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Since the statute of limitations for collecting back taxes is only 3 years (IRC 6501) there is no loss of tax deduction for years prior to 1999 and the s/l for 99 could expire as early as 4/15/03. So why go to the IRS? Second IRS has no formal program to review SEPS- there is only audit risk. Third reg requiring "executed document" (whatever that means???) is only a proposed reg which cannot be enforced against the taxpayer. I dont know where you get the basis for saying that there is no plan without an executed document since there is no such requirement in the code. In fact a SEP is no different than a 403(B) annuity plan which is not required to be in writing under the IRC. At most the executed document can be interpretated as a safe harbor. Fourth is it possible that the er adopted the plan by some other alternative, e.g., signed a statement adopting the plan and filed it with the sponsor of the SEP or adopted the plan pursuant a board resolution?

Fact that a signed adoption agreement cannot be located now does not mean that no document was signed in 95- it may be that the original has been misplaced. Soluton may be for er to adopt a SAR SEP updated for Gust/Egtrra, etc for 2002 and just let the s/l take care of the open years.

mjb

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NO, NO, NO, NO.

1. The requirment of a written SEP is embodied in IRC 408(k)(5) -- "written allocation formula." It is also embodied in several other sections. A SEP is an IRA that satisfies additional rules. It must be in writting to satisfy the rules. See IRC 408(k). See. too, 1.408-7(B)--

Section 1.408-7 Simplified employee pension.  

(a) In general. The term "simplified employee pension" means an individual retirement account or individual retirement annuity described in section 408(a), (b) or © with respect to which the requirements of paragraphs (b), (d), (e), (g), and (h) of this section are met and the requirements of Section 1.408-8 are met with respect to any calendar year.  

(b) Establishment of simplified employee pension. In order to establish a simplified employee pension, the employer must execute a written instrument (hereafter referred to as the simplified employee pension arrangement) within the time prescribed for making deductible contributions.  This instrument shall include: the name of the employer, the requirements for employee participation, the signature of a responsible official, and the definite allocation formula specified in section 408(k)(5) and paragraph (f) of this section.

Either the plan is adopted or it isn't. If it isn't, then there is no plan. How/whether it's adopted is a matter of state law. If it can't be found, then it does not exist!!

The ability of an employer to establish an account for an employee is not mandatory. Failure to do so, however, means that there is no valid plan for the year.

Further, under proposed Section 1.408-7(d)(2), employers may execute necessary documents on behalf of employees who are unwilling or unable to execute those documents or whom the employer is unable to locate. This remedial rule prevents an employer's SEP arrangement from being disqualified because of a recalcitrant employee or one who has left the employer's service and is unable to be located by the employer. (See also proposed Section 1.408-9© for possible reporting requirements in this instance.) Comments were requested in 1981 as to what alternative remedial action, in lieu of execution on behalf of employees, employers would wish to take to avoid disqualification of their SEP arrangements. Comments were also requested on the proposed rule as to whether in a particular State there is any law that would preclude this action by the employer on the employee's behalf.

Employer contributions which exceed the amounts called for under the written allocation formula for the SEP arrangement are treated as if made to the employee's individual retirement account or individual retirement annuity, maintained outside the employee's SEP. It is contemplated that the employer, when it discovers the erroneous contribution, will notify the employee of the amount of the non-SEP contribution made in excess of the allocation formula. Because this amount may result in an excess contribution when made the employee may wish to take appropriate action in order to avoid IRA penalties. The normal IRA rules under Code section 219 apply in such a situation. This rule was proposed in order to prevent the entire SEP arrangement from being disqualified due to an inadvertent error on the part of the employer, such as an incorrect calculation of employee compensation. Under Code section 408(k), the entire SEP arrangement could be disqualified on account of the excess contribution. This rule was proposed to provide relief in such cases. See proposed Section 1.408-7(f) and the example of how the rule would operate in a particular case.

If a document states that it must be fully completed to be effective, why do you believe that such a requirement doesn't apply?

2. The S of L does not expire when the employer fails to file form 5330 to pay the 10 percent tax on nondeductible contributions. See IRC 6501© regarding "false returns," "willful attempts to evade tax," and "no returns."

3. Form 5329 is used to pay the 6 percent tax on excess IRA contributions. With no form filed, it wd appea that the S of L does not start.

4. The amount of unreported tax may be of concern, as criminal penalties cd be also involed.

5. See SEP Audit Guidlines in IRM 4.72.17. The IRS will audit about 330-420 SEPs in 2003, see SEP Nation Wide Program FY 2002. The program will review the 2000 tax year.

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I don't agree with such a broad statement.

A board resolution may be sufficient to establish an ERISA plan if it contains all of the elements required under the standard of Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc); Horn v. Berdon Inc. Defined Benefit Pension Plan, 938 F.2d 125 (9th Cir. 1991). However, a board resolution that merely authorizes the creation of a plan or approves a recommendation to establish a specific plan does not constitute the formal establishment of a plan. Cinelli v. Security Pac. Corp., 61 F.3d 1437 (9th Cir. 1995). See, too, Louisville Tin & Stove Co. v. Commissioner, 287 F.2d 887 (6th Cir. 1993) (board resolution approving adoption of plan is insufficient until final terms of plan have been approved).

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I dont see any requirement in IRC 408(k) for a SEP to either be adopted by a board resolution or that it must be a written instrument executed by the employer. The cited regs are, as of last dec., only proposed and cannot be enforced against a taxpayer who fails to follow them. At most the proposed regs are a safe harbor for employers who adopt a SEP. There is also a big difference between a written allocation formula and a written instrument executed by an employer (whatever that means). The IRS has had 25 years to write regs on SEPs (which is the same amount of time as the time for writing regs under FSAs requiring substantiation of claims) and taxpayers should have notice in the form of a final reg if the IRS deems a formal written executed document to be a necessary requirement for establishing a SEP (even though it is not in IRC 408(k)). Maybe the reg has not been finalized because the Treasury Dept cannot support the written executed document requirement.

mjb

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Gary: The s/l for the 5329 form is three years because it is an attachment to the 1040 and is not filed separately. Also I dont see any application of the criminal penalites or penalities for willful attempts to evade tax, etc in a situation based upon the application of a proposed reg.

mjb

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MBOZEK

1. FORM 5329 Statute of Limitations DOES NOT RUN. In an IRS Service Center Advice (SCA 200148051 (Sept 20, 2001)), the Service indicated that the S of L will not run on an unfiled Form 5329.

In the facts of the SCA, the taxpayer converted his Roth IRA in 1998 and elected to report the income over the four year period. The deadline for recharacterizing a year 1998 conversion was December 31, 1999. In April, 2000, the IRS issued the taxpayer a notice of unreported income. The additional income resulted in the taxpayer's income exceeding the $100,000 threshold, thus rendering the conversion invalid. The taxpayer filed Form 5329.

According to the SCA, there is no statute of limitations on the Service determining that the Roth IRA is improper. Nor will the statute start to run on the 10% early withdrawal tax or the 6% excess contribution tax if a Form 5329 is not filed, meaning that these taxes can be assessed at any time.

See, too, GCM 39019 (Aug 3, 1983); some of the examples of errors not eligible for the mathematical error procedures were: (1) a deduction was claimed on line 25, Form 1040 for contributions to IRAs but no code was entered to identify the type and number of IRAs; (2) a code was entered but the deduction claimed exceeded the monetary amount of the statutory limit for the type and number of IRAs indicated by the code; (3) an excess contribution was made to the IRA based on the deduction claimed, but no excise tax was reported on line 57-Form 1040 and Form 5329 was not attached to the return.

In example (3), of that GCM further concluded that "even if it were possible to determine that an excess contribution had been made from the tax return filed, the GCM concluded that the excise taxes imposed by sections 4972 and 4973 could not be summarily assessed as math errors based on the Form 1040. Moreover the GCM concluded that there was no substantiation omission, within the meaning of section 6213(g)(2)(D) where a taxpayer does not attach Form 5329 to report excess contribution excise taxes. Excess contributions and the appropriate excise tax are reported on Form 5329, which must be attached to Form 1040. However, Form 5329 calculates a tax not otherwise reported on Form 1040 and Form 1040 does not provide for reporting the excise tax. Therefore, the GCM concluded that math error procedures may not be used when Form 5329 is not attached, even if it were possible to determine from other information on the return that an excess contribution had been made."

2. UNwritten SEP arrangements

2a. Do you really think a SEP can exist without numerous items being in writting and duly adopted by the employer?

I'm not clear. In your world, does the underlying IRA have to exist or can it too be an unwritten "arrangement?"

2b. Do you believe that the regulations were written in a vacumn and do not embody what the law requires for an ordinary and necessary expense to be deductible? Would contributions be deductible or is it a tax-exampt organixation?

2c. Do you know the name of a trustee/custodian that will accept contributions under a nondocumented plan?

2d. How, for example, would the nondocument "insure that excess contributions are distributed" under IRC 408(k)(6)(F)?

2e. Do the DOL disclosure regulations (which are final) apply to this arrangment? How do you distribute this unwritten plan to the employees? Do you think the full ERISA reporting rules (SPD, Notices, and so on) would apply, or do you think the simplified reporting and disclosure procedures would apply (or is it an unwritten unapproved prototype)?

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Guest blaum8

Thanks for the excellent discussion. After consultation with EP officials at the IRS, it appears the document issue may be subject to correction via a VCSEP filing or a "walk-in CAP - SEP" under EPCRS.

{{ Please keep us informed. }}

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I hadn't notice that the IRS issued any PLRs specifically authorizing an elective SEP under 408(k)(6)? Do you have the ruling number so I can keep track of this interesting development? THX

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  • 2 weeks later...

Gary: this a response to your march 25 post

1. I have read the SCA that you noted but failed to find any indication that the S/l for tax under IRC 4973 was discussed since the IRS assessed the tax before the 3 yr s/l expired. Further IRC 6501(b)(4) provides for S/l purposes that if a taxpayer files a tax return which includes an entry regarding an excise tax, including an entry on the return showing no liability for such excise tax during the period for the return, the filing of the return shall constitute the the filing of a return for the amount of such tax which are required to be reported for such period. Since a 1040 form provides an entry for payment of excise taxes, an entry of 0 on the line 58 will be sufficient to start the s/l for collection of the tax.

2. I have only questioned your assertion that a SEP must be provided as an executed instrument which is only stated in proposed regs which cannot be enforced against a taxpayer. The IRS cannot create additional requirements in the absence of statutory authority. Some plans (eg. 403(b) plan) can be maintained under the IRC without the need for a written plan document. Also why should the IRS require an executed instrument for a SEP when the proposed regs for 125 plans only require a written plan document?

mjb

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1. Statute of Limitation. I do not agree (nether did GCM 39019, ex 3) with your conclusion that seems to be based on a misreading of what you wrote above. The "return" mentioned in your uncited quote would be the 5329 not the 1040.

Excess contributions and the appropriate excise tax are REPORTED on Form 5329, which must be ATTACHED to Form 1040. However, Form 5329 calculates a tax not otherwise reported on Form 1040 and Form 1040 does not provide for reporting the excise tax. Form 1040, requires that the "tax" from Form 5329 be entered in an area called "Payments" of which none were made. The GCM concluded that math error procedures may not be used when Form 5329 is not attached, even if it were possible to determine from other information on the return that an excess contribution had been made [which it could not in this case or in your situation]. The amount "reported" on Form 5329 is "paid" by entry on Form 1040, no more, no less. And as a consequence, the S of L will not run on an unfiled Form 5329.

2. Executed documents.

Puffffff. Okay, the regs don't exist anymore; only the Code and DOL rules apply. The SEP must contain a "written allocation formula" for starters under IRC 408(k). Since a SEP is an IRA that must also satisfy other rules (like the written allocation formula), lets turn to the IRA rules that require a "trust" valid under state law (and which wd appear to have to be in writing to satisfy Code Sections 408(a) or (b)). If the trust does not exist, there can be no deduction under Code Section 404. No correction procedure can apply. FURTHERMORE, the DOL regs require a written document. Well, not, really; the alternative is to subject the plan to the FULL reporting requirements under ERISA (full SPD (just like a QP), Notices, and so on). You still haven't indicated whether the IRAs are model, prototype, or a vapordocs (or the trustee that's accepting such a program). Finally (not that there isn't more), how does this "thing" satisfy the "only if such written geverning instrument" requirements (of which there are several) of Code Section 408(a), first sentence.

Even though you haven't specifically stated what was adopted, how, and what it contained, I strongly suspect that it does't amount to a plan. Even if it did, the ERISA problems could cause you to think that not having an individually designed SEP plan was a better position to be in.

In a few days, i'm going fishing and hope to miss any further discussions on item 2 above. You just can't be serious and this can't be a real situation. You still haven't provided the ruling number for the IRS approved documents you referred to. :ph34r::ph34r::ph34r:

Why not post whatever it is that constitutes the plan and we can all vote on it's validity as a SEP-IRA. Thus, we can play "Hang the Moderator or Hang the Initiator."

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