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SIMPLE IRA definition of Compensation


Guest ButchElfers
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Guest ButchElfers

Per the IRS form 5304 form, compensation is defined as ..."the sum of wages, tips, and other compensation from the employer, subject to federal income tax withholding (as described in section 6051(a)(3))...including salary reduction contribution under this plan..."

Does this mean that eligible compensation should be reduced by anything paid thru the section 125 plan? For example, if an individual earns $30,000/year and contributes $2,000 to an FSA account and $1,000 to the SIMPLE IRA, should that individual base their match on $28,000 (and thus match $840, instead of $900)? Any help is appreciated.

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Although SIMPLE IRA compensation is not reduced by elective contributions to the plan (and other plans of the employer), it does NOT include elective deferrals to a Section 125 plan. [see SIMPLE Plan LRM item #15 (4-2005)]

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Guest ButchElfers

Thanks Gary. You are always very helpful!

You offered SIMPLE Plan LRM item #15 (4-2005) as a reference point. Where would I find that?

My guess is many (if not most) companies are using the top line gross compensation number and are matching it incorrectly. Any thoughts?

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Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA plan) Listing of Required Modifications and Information Package (LRM) [4-2005] This information package contains samples of plan provisions that satisfy certain specific requirements of the Internal Revenue Code, as amended through the Working Families Tax Relief Act of 2004 (Pub. L. 108-311).

Link to SIMPLE Plan LRM

So far I have had only one SIMPLE plan that needed correction. Many of the SEPs/SARSEPs that are referred to me do have problems (generally coverage; sometimes ADP and top-heavy issues). IMO, most operate in accorance with the rules.

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