Gary Lesser

And rightfully so. You are correct, it is a SIMPLE. If make up contributions are required, I believe it would be appropriate to make a deemed elective contribution equal to half of the HCE rate of contribution for the HCE with the highest percentage. Any thoughts on this?[/color]

Assuming the "only" employee was excluded, the error could be considered egregious (requiring IRS approval and higher fees to fix). In general, the employer will have to make a make up deferral (equal to half of the ADP rate) and matching contributions with reasonable interest. The amount must be restored to the plan and can not be given directly to the employee. See example 3 in Rev Proc 2006-27. BTW, the employer was at fault for not following plan provisions. Based on your facts, there is no one to blame but the business owner. Bet it was egregious too (e.g, consistantly and improperly covered only HCEs) (see Sec 4.11 of Rev. Proc 2006-27). SEPs are very unforgiving if not fixed and the error discovered.

1. No.

Unless you have business expenses to claim, you may be better off not paying self-employment income (this year). The situation may change next year. Personally, I am not convinced you have any SE income for plan purposes. If an individual writes only one book as a sideline and never revises it, he would not be considered to be "regularly engaged' in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, and, if it is not one of the excluded professions of section 1402© of the Self-Employment Contributions Act, the income from it is includible in computing net earnings from self-employment, subject to the limitations of section 1402(b) of the Act. [i.R.C. § 1402(e)-(k); Rev. Rul. 68-498, 1968-2 C.B. 377] Hope this helps.

No. The eligibility requirment is based on "service" during a year. So, any service equals 1.

The SEP likely contains a definition of compensation that would likely reference the plan year for allocation purposes. Compensation during that period should be used for all employees who are treated as employed by a single employer.

See jpods post. If you would like for the IRS to determine whether or not a worker is considered an employee, submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Agreements and waivers may be helpful, but not for the faint of heart. If you don't do anything else, check out Derrin Watson's book, Who's the Employer (4th Ed), Chapter 3 and Q 3:37. Also see Rev Ruls. 57-71, 53-84, 61-178. An essential element for "professionals" is the degree of control. In regard to fixing the problem (if it really exists), see Section 6.10 of Rev. Proc. 2006-27 regarding make-up amounts with reasonable interest.

Probably. See Rev. Proc. 2006-27, Section 6:10. Hope this helps.

Agreed. If DB adopted the amount in excess of 6 percent of applicable compensation may not be deductible, but that does not make it an excess contribution that can or should be removed from the IRA. Consider, however, that the DB deduction might make a recurring 10 percent penalty seem small. Another DC plan would make absolutely no sense.

Generally, SEPs follow the alternate disclosure rules; if so, quarterly statements not required.

State Conformity to the Federal Tax Treatment of HSAs -- The TRHCA of 2006 made changes to the HSA rules, which are generally effective for taxable years beginning after December 31, 2006. A State's conformity with the Code will indicate whether the State conforms to the recent changes to the new HSA new rules that follow: • Modifies the limit on contributions to HSAs, so that it is not limited to the annual deductible of the high deductible health plan ("HDHP"); instead, contributions would be limited only by indexed dollar amount ($2,850 self-only and $5,650 family for 2007; $2,900 self-only and $5,800 family for 2008). • Allows individuals who become covered by a HDHP after January to contribute up to the full annual limit, even if they were only eligible individuals for a portion of the taxable year. • Permits an individual to transfer the balance remaining in his or her FSA or HRA account as of September 21, 2006 (or, if less, the balance on the date of the transfer) to an HSA. The transfer must be made before January 1, 2012. • Requires the Secretary of Treasury to announce the cost-of-living adjustments applicable to HSAs by June 1 of each year. This change is effective for tax years beginning after 2007. • Allows coverage under a health FSA during the "2-1/2 Month Grace Period" to be disregarded for eligible individuals who have a zero balance in their HSA at the end of the previous calendar year. • Allows employers to make contributions to HSAs on behalf of non-highly compensated employees in higher amounts (or higher percentages of deductibles) than to highly compensated employees without violating the comparable contribution rules. • Allows individuals to make a one-time distribution to rollover amounts from an IRA to an HSA, subject to the HSA contribution limit. In general, a majority of States conform their state income tax laws to the federal income tax rules set forth under the Internal Revenue Code of 1986, as amended (the "Code"). A number of these States incorporate the Code by reference, conforming to any and all amendments made to the Code. Other States conform to the Code as of a specified date. In this instance, a State will generally not conform to amendments made to the Code after this specified date. Only until the respective State legislature updates the date of conformity with the Code under the State's statute will the State conform to recent changes made to the federal tax laws. As a practical matter, however, unless a State amends its tax forms and instructions requiring taxpayers to, for example, "add back" HSA contributions that are otherwise deductible or excludible under federal law, it is unlikely that the State will pursue the collection of tax on these unreported amounts. As a consequence, there are several states in which the state tax consequences of HSA participation differ from the federal tax consequences (for example, where HSA employer contributions that are excludable for federal tax purposes are required to be included in income, where interest earned on the HSA is taxed, or where deduction for state tax purposes is not available). See Chapter 8 and Appendix G (a 35 page chart) in the Health Savings Account Answer Book (4th Edition, in Press) for more specific information regading whether a particular State conforms to the Code, and the date upon which conformity is enumerated in the State's statute (if any). My understanding (as of SEPTEMBER 28, 2007) is as follows: Alabama -- Generally No--Fed Tax / No--TRHCA '06 Arizona -- Yes--Fed Tax / No--TRHCA '06 Arkansas -- Yes--Fed Tax / No--TRHCA '06 California -- No--Fed Tax / No--TRHCA '06 Georgia -- Yes--Fed Tax / No--TRHCA '06 Indiana -- Yes--Fed Tax / No--TRHCA '06 Iowa -- Yes--Fed Tax / No--TRHCA '06 Massachusetts -- Yes--Fed Tax / No--TRHCA '06 Minnesota -- Yes--Fed Tax / No--TRHCA '06 New Jersey -- No--Fed Tax / No--TRHCA '06 Ohio -- Yes--Fed Tax / No--TRHCA '06 Oregon -- Yes--Fed Tax / No--TRHCA '06 Vermont -- Yes--Fed Tax / No--TRHCA '06 Wisconsin -- Yes--Fed Tax / Yes--TRHCA '06: Senate Bill 2, brings Wisconsin into alignment with federal law and tax code provisions in most states. Wisconsin was one of only five states that failed to permit tax deductions for HSAs. S.B. 2 passed the Senate Jan. 20, 2011, by a vote of 20-13. The measure won support in the House later in the day by a vote of 66-28. ALL OTHERS -- Yes--Fed Tax / Yes--TRHCA '06 STATES WITHOUT PERSONAL INCOME TAXES: Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Yes, the catch-up contribution ($800 for 2007) is prorated the same manner as the annual contribution. However, if the individual is not eligible on the first day of taxable year (generally January 1) and the individual is covered under a HDHP on December 1 (and is otherwise an eligible individual), the full year's limit (for 2007, but not 2006) can be made. Testing period rules will require the individual remain eligible for thenext 12 months. Hope this helps.

MJB, Unless the nonowner contributions amounts are known, one-half of the SE tax is unknown. Therefore, the "1/2 of the SE tax deduction" must be determined on the fly (as the pla is being designed-generally arount the owner or owners. The IRS worksheets only works after the plan has been designed. You may find the attached software program, QP-SEP Illustrator, helpfull. The 2006 version is attached. GSL Galactic Consulting Software Installation (For all Microsoft Windows®-based operating systems, including “Vista”) Install to hard drive. Run (open or execute) GSL-QPSEP to install QP-SEP (Cor-Sar and Keo-Sar) programs. Accept all defaults. Program will install two icons on your desktop. Click on the desktop icon to launch desired program. Your screen may go blank for a few seconds while program loads (this is normal). Once Title screen loads, press any key to exit Title screen and enter input screen. Press [Alt]+Q at any time thereafter to Exit program. Designed to be used for: Designing retirement plans and allocating contributions under SEPs, SARSEPs, profit sharing, and money purchase pension plans for corporations, partnerships, and self-employed individuals. Key features: Automatically calculates net earned income, self-employment tax, integration spreads, actual deferral percentage (ADP), top-heaviness, and limitations on contributions and their deductibility. Ineligible owner and guaranteed payment partner situations can also be handled. Other factors, such as outside W-2 income and self-employment gains and losses, are also taken into account (if entered). Top-heaviness is based on document type entered, e.g., model or prototype. Client illustrations can be printed, saved, and recalled. Starting the program: To operate program or to view the instructions after installation, click the Start button, select Programs, open (click on) the GSL-QPSEP and click (open) the icon for the program you wish to run (COR-SAR for corporations, or KEO-SAR for unincorporated entities) or to view or print the instructions and other information charts. The program can also be started directly by clicking the yellow and red "COR-SAR" or "KEO-SAR" icon on your desktop. For support call me at 317-254-0385. GSL_QPSEP.ZIP

Unless the nonowner contributions amounts are known, one-half of the SE tax is unknown. Therefore, the "1/2 of the SE tax deduction" must be determined on the fly. You may find the attached software program, QP-SEP Illustrator, helpfull. The 2006 version is attached. GSL Galactic Consulting Software Installation (For all Microsoft Windows®-based operating systems, including “Vista”) Install to hard drive. Run (open or execute) GSL-QPSEP to install QP-SEP (Cor-Sar and Keo-Sar) programs. Accept all defaults. Program will install two icons on your desktop. Click on the desktop icon to launch desired program. Your screen may go blank for a few seconds while program loads (this is normal). Once Title screen loads, press any key to exit Title screen and enter input screen. Press [Alt]+Q at any time thereafter to Exit program. Designed to be used for: Designing retirement plans and allocating contributions under SEPs, SARSEPs, profit sharing, and money purchase pension plans for corporations, partnerships, and self-employed individuals. Key features: Automatically calculates net earned income, self-employment tax, integration spreads, actual deferral percentage (ADP), top-heaviness, and limitations on contributions and their deductibility. Ineligible owner and guaranteed payment partner situations can also be handled. Other factors, such as outside W-2 income and self-employment gains and losses, are also taken into account (if entered). Top-heaviness is based on document type entered, e.g., model or prototype. Client illustrations can be printed, saved, and recalled. Starting the program: To operate program or to view the instructions after installation, click the Start button, select Programs, open (click on) the GSL-QPSEP and click (open) the icon for the program you wish to run (COR-SAR for corporations, or KEO-SAR for unincorporated entities) or to view or print the instructions and other information charts. The program can also be started directly by clicking the yellow and red "COR-SAR" or "KEO-SAR" icon on your desktop. For support call me at 317-254-0385. ________________________________________ GSL_QPSEP.ZIP

There is no guidance on point that specifically addresses rolling eligibility in the case of a SEP or SIMPLE. Depending on the facts and circumstances the IRS could easily demonstrate (using qualified plan rules) that the plan is discriminatory. THAT BEING SAID, the IRS has allowed plan provisions that allow for current employees to participate in a SEP and future employees to satisfy service requirements. But that is not the same as rolling eligibility. I'd be careful. Consider a PLR?

Indeed it does. I've attached a PDF of Pershing's SEP Adoption Agreement. Pershing_Prot_with_Immediate_Elig_4_Current_Es.pdf

Surely, someone has some documents they could look at and report back on!

It depends. If the March 2002 version of Form 5305A-SEP is being used, the June 2006 version does not need to be adopted. The December 2004 version of Form 5305-SEP was not required to be adopted if the employer was using the March 2002 version (which had to be amended by December 31, 2002). [The compensations are automatically increased to the current years limits.] Hope this helps (and you don't need need information for an earlier year's form).

Moe, The compensation cap does apply to the 2 percent nonelective contribution in a SIMPLE-IRA (but not matching). It also applies to a 401(k) SIMPLE for both matching and nonelective contribution purposes.

Minister’s housing. The rental value of a home or a housing allowance provided to a minister as part of the minister’s pay generally is not subject to income tax but included in net earnings from self-employment. For plan purposes, compensation goes not generally include amount excluded from income. You must also examine closely whether the individual is an employee of an organization or truly self-employed (and to what extent). Fees, tips, and other amounts received from the congregation for services may generally be treated as compensation (earned income) for plan purposes. See also IRS Publications 517 (discussing the taxation of housing allowances, at page 8) and 590 (discussing what is not compensation, at page 8). Both Publications are attached. Hope this helps. p590.pdf p517.pdf

The resolution (of the B-of-D, Partnership, or Sole-Proprietor) could state that the adoption of the attached model plan is adopted as an amendment and restatement of the existing plan.

[Christine, sorry it took so long to reply!] No. If the the prohibited group members had performed service in the three plan years prior to the plan's adoption, the plan could be amended at any time. [incidently, we still have no guidance on this issue regarding SEPs and SIMPLE-IRAs.] IMO, the IRS would argue that the SEP nondiscrimination rules would be interpreted the same way as the QP rules were. See guidance provided in following (pre-ERISA) revenue rulings:

Notice 98-4 provides that the contribution must be made to a SIMPLE-IRA; fortunately, it also provides that:

Does anyone know whether the IRS is allowing SEP prototypes to provide for immediate eligibility of existing employees (assume there is only one, the owner) of a new employer, and for future employees to satisfy a three-year service requirement? I've heard that the IRS is "no longer" allowing such provisions (but a few may have gotten through). All comments appreciated. The SEP-LRM (attached) does NOT provide for such a provision. sep_lrm_2_2002.pdf

The SEP contributions are not considered in the 401(k) plan's testing. However, the SEP contributions are generally treated as contributed to a profit-sharing plan for deduction and Code Section 415 purposes. The plans are aggregated for elective limitation purposes (which are also individual limits - $15,500/20,500 for 2007). Hope this helps.