LLC owners and SIMPLE IRAS

[Guest Jae]

Can an LLC owner participate in a SIMPLE IRA? At this point the owner is not active and is not taking any salary from the LLC, only a draw (not compensation) but he would like to become active in the business, could he participate in the company's SIMPLE and get matching funds from the company?

Thanks.

[R. Butler]

Yes.

[Guest Jae]

Can you give me a cite for that?

I read 408(p) as saying that self employed individuals can not get matches. Under 408(p)(9) the "matching amount" is not treated as a match for self employed individuals, and 408(p)(2)(iv) says that only salary reductions and matches can be used to fund the SIMPLE. This seems to say that the owner of an LLC treated as a partnership (and thereby "self-employed") can only make a $6000 salary reduction and that the company cannot match.

Thanks again.

[R. Butler]

I think you are misunderstanding 408(p)(9). A matching contribution under that provision on behalf of a self-employed individual is not treated as an "ELECTIVE CONTRIBUTION" for purposes of the $10,500 limit on such contributions. The purpose of the provision is to treat self-employed pesrson in the same manner as employees for purposes of the limit on elective contributions. See also Notice 99-55.

In your initial question you ask specifically about matching contributions, but in your reply you state that SIMPLE IRA's can only be funded with deferrals and a match. That is incorrect. Instead of a match the employer can make a 2% nonelective contribution for all eligible employees. The instructions to the 5305-SIMPLE form does a pretty good job of explaining the SIMPLE IRA.

I hope this helps.

[Gary Lesser]

As long as the draw turns out to be earned income (i.e., not a loss for the year) a contribution can be made. The match + contribution cannot exceed the earned income amount. For example, if a self-employed earns exactly $6000, then the elective amount cannot exceed $5825.24; the 3% match is $174.75.

[R. Butler]

Mr. Lesser

It has always been my understanding that the deferreal could not exceed earned income, but the employer portion plus the deferrals could exceed earned income. I am fairly certain that I read this in The SIMPLE Answer Book or some such reference book, but I could be wrong. Do you have a cite for your answer?

[Gary Lesser]

You are correct; contributions from all sources cannot exceed earned income (assuming one borrows from the qualifed defined contribution rules under Code Section 404(a))8)©, which of course, do not directly apply to a SIMPLE plan). I do endorse the "recharacterization approach" for EI amounts of $6,180 or below. The IRS has not issued any guidance, however, in this matter. In addition, nondeductible contributions may be subjecrt to additional penalties. Hope this helps...Gary