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SEP, Simple Plans and ERISA


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Is a SEP IRA Plan or a Simple IRA Plan subject to Title I of ERISA?

Please reference any resources stating your case.

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In most cases, a SEP an ERISA covered plan. It is also subject to the PT provision under the Code.

Under Section 4(a) of the Employee Retirement Income Security Act of 1974 (ERISA), the only employee benefit plans subject to Title I of ERISA (regarding the protection of employee benefit rights) are those within the meaning of ERISA Section 3(3), provided such a plan is established or maintained by an employer engaged in commerce or in any industry or activity affecting commerce, by an employee organization or organization representing employees engaged in commerce or in any activity affecting commerce, or by both.

The term employee benefit plan includes an "employee pension benefit plan." [ERISA § 3(3)] Most SEPs and SARSEPs are employee benefit plans under ERISA; however, many exclusions and exceptions apply. SIMPLE IRA plans are subject to special rules (see chapter 14).

Section 3(2)(A) of Title I of ERISA defines the term employee pension benefit plan as follows:

[A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program

i. provides retirement income to employees, or

ii. results in a deferral of income by employees for periods extending to sthe termination of covered employment or beyond,

regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.

Plans without employees are not covered under Title I of ERISA. [DOL Reg. §2510.3-3] Thus, for purposes of Title I, the term employee benefit plan does not include any plan, fund, or program under which only a sole proprietor or only partners are participants covered under the plan. An individual and his or her spouse will not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, that is wholly owned by the individual or by the individual and his or her spouse, and a partner in a partnership and his or her spouse will not be deemed to be employees with respect to the partnership. It is unclear, however, whether a limited liability company that is treated as a partnership for tax purposes and that has no common-law employees is excluded from coverage under Title I.

Example: Puck establishes a SEP for his sole proprietorship. Puck and his wife, Mookie, are the SEP's only participants. A third employee is ineligible to participate for the current plan year. Puck causes his SEP IRA trustee to unwittingly purchase a piece of real estate as an investment for the IRA that Puck indirectly owns. Although the plan is exempt from Title I of ERISA, the transaction is, nonetheless, a prohibited transaction under the Code (see Q 4:18).

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There are two levels of anlaysis:

1. is a SEP subject to ERISA.

There is very little law on whether a SEP/SIMPLE which cover common law ees is subject to ERISA because it is funded through an IRA. While technically a SEP/Simple is subject to ERISA because it is funded by employer contributions, courts have not considered SEPS subject to the provisions that apply to employer sponsored plans, e.g., EAB v. H. Frankel, 555 NYS2d 1016 (non alienation rules do not protect participant's assets from non bkcy creditors) or In re Groff, 234 BR 153 (QDRO does not apply to SEP).

2. What sections of ERISA apply

SEPs/simples are exempt from ERISA Reporting and Disclosure if the er provides the notices required for the respective plans. The eligiblity and funding provisions do not apply, vesting is 100% and SEP assets are not held held under the fiduciary provisions of ERISA because there is no trust to manage the accounts and the legislative history of of the 78 tax act states that SEPs are to be treated as an IRA after contributions have been made. (Simple IRAs are subject to the 404c rules upon the earlier of 1 year or the date the participant first exercises control over the account. I dont know whether other fid rules would apply before or after that date). The PT rules of the IRC apply to violations such as the owner getting kick backs from the providers or agent from plan contributions. The only places where ERISA clearly applies are

the requirement to remit employee contributions to the provider after they have been identified and the claim provisions. There is a strange case where the 6th circuit appeals ct held that a SEP participant is protected under 510 of ERISA for exercising rights. The right that was protected was the right to continue employment which is not an ERISA benefit protected under 510.

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  • 4 months later...
Guest deenydeeny

Hi Gary, quick question for you... I am self employed and my accountant gave me an 8K tax deduction on my 1040, and I was SUPPOSED to deposit this in a SEP account. I didn't ask enough questions and didn't realize this was my responsibility... I know, I'm an idiot.

Rather than file an amended tax return and lose my 8K deduction, I called the Dept of Labor to see if I can participate in the voluntary correction program and their response was... only if SEP is covered under ERISA, and they told me to call the IRS to find out since they didn't know... go figure. So, I've been digging into this on the web and see all sorts of conflicting info. I see court cases from '98 which say it is covered, I see tax bills from '02 which add SEP's to ERISA, but many people are still saying SEP's aren't covered under ERISA. Can you help clarify for me?

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Whether or not the plan is covered by ERISA doesn't appear relevant to your situation.

Using the information you've provided, and then making an assumption or two------The short answer is that there's no way to get a deduction. You're saying the contribution wasn't timely made.

I'm not seeing where the Department of Labor's rules have applicability. It's a 1 person, owner only plan, for one thing. Furthermore, the DOL correction applies to late filed form 5500's; that's not relevant here.

The IRS correction program does cover SEPS, but you've not failed any SEP requirements such as nondiscrimination, full vesting, etc. that are found under Internal Revenue code subsection 408(k). You've not met the section 404 contribution time frame, and that can't be cured via the IRS program.

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Deductions for SEPS for 2005 must be made by the date for filing the employer's tax return with extensions which for a self employed person was Oct 16, 2006. There is no correction program for failing to make a timely contribution only a loss of deduction. Coverage under ERISA is not relavent since tax deductions are regulated by the IRS. Better talk to your accountant about amending the tax return.

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