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Exclusive Rule - Simple IRA & PS Plan

Guest DTrom

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The sole owner of a small business is the only participant to make any contributions this year (2004) to the Simple IRA plan.

The company would like to fund a profit sharing plan rather than continue the Simple.

If they start the profit sharing plan for 2004 can the amount contributed to the simple be distributed as a return of excess contributions, since the exclusivity rules will be violated? If the distribution is done before the tax return is due is there still a penalty?

Would the prior year contributions be effected? Is this even possible?


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The simple IRA excess contributions (caused by the 2004 adoption of a QP) are included in Box 1 of Form W-2 (or not deducted in the case of a SE individual) to avoid the 10% penalty on nondeductible contributions. The excess (including gain/loss) should be removed from the SIMPLE IRA by the participant's return due date to avoid the possibility of double taxation under IRC 408(D)(5). Any distributed gain is taxable. The excess can not be rolled over or transferred to anything since it is not an eligible rollover distribution. It can not be returned to the employer. [it is unclear whether the nonelective amounts included on Form W-2 are subject to FICA/FUTA in the case of a common-law employee.] Here, the excess amount will be treated as EI and subject to SE tax.

Whether the "excess" amount contributed (that is included on Form W-2 or not deducted if SE) is treated as 401(k) plan compensation is to be determined by the definition of "compensation" found in the new QP.

Hope this helps.

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