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SIMPLE IRA Compensation

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A payroll firm just informed one of my clients that total compensation for SIMPLE IRA contributions do not include an employee's contribution to a Section 125 plan. They are saying that only compensation subject to Soc Sec taxes are included. Is this true?

The Model form 5304 does seem to be silent on this in the Definition of Compensation in Article V.

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Amounts deferred by an employee under a Section 125 cafeteria plan are not treated as SIMPLE-IRA compensation. See SIMPLE-IRA LRM (section 15). [iRC 408(p)(6)]

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Also a FAQ from the IRS' website:

What definition of compensation applies for purposes of the SIMPLE IRA plan rules in the case of an individual who is not a self-employed individual?

For purposes of the SIMPLE IRA plan rules, in the case of an individual who is not a self-employed individual, compensation means the amount described in section 6051(a)(3) (wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a)), and amounts described in section 6051(a)( 8 ), including elective contributions made under a SIMPLE IRA plan, and compensation deferred under a section 457 plan. Compensation does not include amounts deferred under a section 125 cafeteria plan. For purposes of applying the 100-employee limitation, and in determining whether an employee is eligible to participate in a SIMPLE IRA plan (i.e., whether the employee had $5,000 in compensation for any 2 preceding years), an employee's compensation also includes the employee's elective deferrals under a section 401(k) plan, a salary reduction SEP and a section 403(b) annuity contract.

Life and Death Planning for Retirement Benefits by Natalie B. Choate



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