Gary Lesser

I must agree with Belgarath. At one time, it was unclear whether compensation earned before a new SIMPLE IRA plan’s effective date might be ignored or had to be prorated. Which course of action applies is important in determining the amount of compensation that is considered by the employer in making its contribution. IRS guidance now provides that nonelective and matching contributions are based on compensation “for the entire calendar year.” In general, the effectve date is the date that the provisions of the plan become effective. I do not see any wiggle room that would allow for, or require proration, in the case of a "short year." A SIMPLE-IRA must be maintained on a calendar year basis (see IRC § 408(p)(6)©) . [i.R.S.Notice 98-4, 1998-2 I.R.B. 26; I.R.C. §§401(a)(17), 408(p)(6)(A); Treas. Reg. §1.401(a)(17)-1(b)(3)(iii)(A)]

Some financial organizations permit the estalishment of a SIMPLE IRA where the employer already has a SIMPLE-IRA plan at another institution. One such organiation is the Seligman Family of Funds (800-221-7844). Does anyone know of other institutions that DO NOT require the employer to adopt "additional" SIMPLE-IRA plans?

The Seligman Family of Funds will accept SIMPLE-IRA contributions on behalf of a participant without requiring a second employer adopted Simple-IRA plan. Page 15 of their Simple IRA adoption packet has a one-page "Employer Special Instruction Form" fo such purpose. Hope this helps. [seligman Retirement Plan Services - 800 445-1777] Does anyone know of other institutions that will do likewise?

Contributions were made to the SEP by an employer. The SEP may need to be fixed under the EPCRS. If there are any 415 violations, the SEP is disqualified last. Since the plan was a SEP, the employer could treat all contributions as employer contributions and restore the wages that were "withheld." Contributions should be made under the uniform allocation formula under the plan. Additional contributions may have to be made and more than one year may have to be fixed. I think that fixing the SEP is very important (not to mention the ongoing 10% penalty for nondeductible contributions).

Although the 401(k) would allow higher contributions/deductions (if desired) it can be done to save costs. Because of the investment mix finding a trustee may be difficult to find a single trustee/custodian that can hold all of the assets in a single IRA (unless some were sold and the proceeds transfered). Although, the annuity can be held in an IRA "trust" the IRA distribution rules would be tied into the annuities value rather than the minimum distribution provisions of the annuity contract. Can the annuities be converted to IRAs with an insurance company so as to avoid any charges or fees? Hope this helps.

Are you saying that none of the employees had any compensation for the year? If so, how (from what) were "elective" contributions made? Were elective contributions made? Were they matched? The penalty may be either 25% or 10% depending upon when the Simple-IRA account was established. Perhaps there is a solution, but more accurate facts are needed.

Note. Following post does not reflect the TRHCA of 2006. See other pinned post. Many states follow the federal tax provisions in determining state tax treatment of contributions and allow a deduction for purposes of imposition of state personal income taxes (AZ, CO, CT, DE, DC, GA, HI, ID, IL, IA, LA, MD, MI, MO, MT, NE, NM, NY, NC, NC, ND, OH, OK, OR, RI, SC, UT, VT, and WV). Some states require specific legislation to allow such a deduction. (AL, AR, CA, IN, IA, KY, ME, MA, MN, MS, NJ, PA, and WI). To date, of these latter states, AR, IN, IA, KY, MN, and MS passed such legislation. Other states impose no personal income tax so the deductibility of contributions is not an issue (AK, FL, NV, NH, SD, TN, TX, WA, and WY). There are currently four 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). These are: Alabama, California, , New Jersey, , and Wisconsin. See Appendix E in the 3rd edition of the HSA Answer Book for more information. Hope this helps.

Notice to Employees re: Termination of Simple-IRA Plan Effective for the plan year ending on _______, the XYZ Simple IRA plan of ______________ will terminate. Thereafter, no further contributions will be made by the employer, nor accepted by the SIMPLE IRA trustee (custodian). Also provide a copy of the notice to the trustee (or custodian) so that they will know not to acccept any further contributions. That's it!

Jim, A hassle-agreed; but SIMPLE IRA can not accept "personal IRA contributions." It should be also be noted that the 6% excess contribution penalty, however, does not seem to apply. If amounts treated as W-2 compenation by employer--to avoid the 10% nondeductible contribution penalty--and the amounts not withrawn in some sort of correcting distribution, the amount may be taxed twice. There are no reporting codes!

Jim (Hi). It may be worth the hassle. The employer can include the amounts on the W-2. [see instructions for box 12, Code S on W-2 Form; compare to specific instructions for Code S box 12 (401(k) plans).] Nondeductible penalty would seems to disappear (amounts reported, best employer can do). All contributions for year are excesses. All elective contributions would however count under 402(g)--the best I can figure out. It would almost appear that the employee must remove the amount, However, there is no form or instruction (or guidance) to suggest so. The 5329 do not include SIMPLE IRAs as being subject to the 6% penalty. There are no distribution Codes for these purposes. Go figure. In any event, it might be helpful for the employer to issus a Notice explaining what happened, the excess amount was included in box 1 of form W-2 for 2006, and how to request a correcting distribution from their SIMPLE IRA trustee or custodian (upon the advice of their tax counsel). Simple-IRAs are not subject to 415 limits. Jim, the 25% percent early distribution penalty should not apply, see ASPPA IRS Q&A # 376, 2000 National Conf. [More fuly discussed in the SIMPLE, SEP and SARSEP AB Q 14:162-14:165 (11th Ed).]

Sure. The employer should also issue a contribution notice each year (starting with 2005 ). Reporting of SEP contributions by employers to IRS only include those made during the year. Thus, contributions made in 2005 for 2004 are just reported as 2005 contributions. Otherwise, yes -- a removal and penalty for 2004. For 2005, the excess can be corrected by removing it before the tax-filing deadline. Gain is not required to be distributed in a correcting distribution made after the (2004) due date. Hope this helps. The excess is treated as a traditional IRA contribution. So, the actual excess amount could be less than the actual 25 percent overage. In this case, there may also be a 10 percent nondeductible penalty tax for the 2004 SEP contribution the individual made as a SEI. [His employer may or may not have also exceeded its deductible limit.] Hope this helps.

Section 125 - I am not sure about a Section 125 plan in Puerto Rico. On June 25, 2004, the Puerto Rico Senate approved House Bill 4746 without amendments. If signed into law by Governor Calderòn, the bill would pave the way for employers in Puerto Rico to establish flexible benefits programs, also known as cafeteria plans. I have no idea what the currect status of this legislation is. HSA - Residents of Puerto Rico and American Samoa may establish HSAs only after statutory provisions similar to Code Sections 223 (relating to HSAs) and 106(d) (relating to employer-provided medical expense coverage) are enacted. [see, Notice 2004-50, Q&A 87, 2004-33 IRB 196]

Employer contributions would have to be based on compensation "for the entire calendar year." [The only guidance issued on this subject was contained in Notice 98-4] Participants have to be sure they do not exceed the 402(g) limit amount in the aggregate for the calendar year.

Regarding item #2, there is also a 10 percent tax for failure to notify affected participants f the ADP failure. The plan was no longer treated as a SARSEP at the end of the following year the notification failure occurrd (thus all elective deferrals become IRA contributions made by participants, the year this actually occurs is uncertain.) There would also be a 10 percent tax on the nondeductible contributions made by the employer on the full amount contributed. The 6- and 10-percent taxes are cumulative. Since some are after the due date, earnings do not have to be withdrawn on those excesses. To some extent, the 6 percent penalty may be mitigated to the extent of the allowable traditional IRA contribution (remaining). There may be an option to distribute the amounts to affected employees for this failure. IRA sponsors may require participant consent. Yes, spreadsheets work nicely if well designed. Several may be needed when different employees are affected by different failures. They are then summarized and explained in the application. A Summary section works nicely. Yes (read: "not really"), BUT everyone pays a lot of penalties and file amended tax returns (attaching Form 5330) for many years reporting their IRA contributions/excesses (Note: different excesses become IRA contributions at different times). There will be a lot of Form filing for each year (e.g., adding amounts to W-2) (possible FICA and FUTA issues). Unfortunately, everything has to be figured out (e.g., spreadsheets) anyhow. Needless to say, many of the Code fix rules are unclear as to timing, but doable. There is a risk that after you're all done, it wasn't done right. EPCRS offers some degree of "reliance." It will be somewhat necessary for employees/owners to be provided detailed notices as to what they must do for each year, they may want to be reimbursed. Getting amounts distributed from the IRAs may be another nightmare. The failure wd appear "egregious." It is easier to fix it under the EPCRS (and everyone will be able to sleep with both eyes closed). You might want to see the SIMPLE, SEP, and SARSEP Answer Book (11th ed), Qs 12:18 through 12:39, and especially the SEP and SIMPLE Charts for Correcting Excesses in Appendix D under the Code (when fixable) and EPCRS (Aspen Publishers, NYC).

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.

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)]

Under the EPCRS there is no Statute of Limitations. Outside of the IRS the same result likely occurs unless Form 5330 was filed and the penaties reported (and presumably paid). Start with Revenue Procedure 2006-27--> LINK to 2006-27 See, in particular, section 6.10. The correction methods are somewhat flawed in regard to SEPs and SIMPLE IRAs. Then you need a good census (compensation, age, DOH, DOT, contributions, and so on). Generally, you need to determine what all the problems are and their associated penalties (e.g., 6% IRA excesses, 10% nondeductible, ADP tests, top-heavy status, 10% failure to give ADP failure notice(s), and so on)--year by year. Some penalties are cummulative. Then formulate an acceptable fix under the EPCRS. Spreadsheets, as attachments, are probably the best way to present the problem and the fix. The application would then summarize the spreadsheets. Several spreadsheets may be needed depending upon the failures. The IRS user fee is generally $250 (but could be higher, see sections 12.02 and 12.06). I have been sucessful in having the 10% fee for retention of assets waived (sponsor is not retaining assets and has no control over them). In some cases, there is more than one possible fix, so the "best" one needs to be determined.

I just thought it should be noted that eligibility is based on "service" (without regard to compensation). Contributions are (of course) based on compensation. Like the age and service requirements, the minimum compensation requirement ($450 for 2006) is determined on a yearly basis ("...for a year only if for such year..."). ALL three are, technically, annual "participation requirements." Example. W has been performing services for husband's sole proprietorship for three years on a part-time basis (she receives no compensation). Each year, W stuffs and addresses 1,000s of marketing brochures for H's business; signing H's name to each one. The following year (year 4), she begins to receive compensation--more than $450--for her services and attains age 21 on the last day of the plan year (12/31). Absent an exclusion (e.g, alien, collectively-bargained), W is eligible to participate in a SEP of H's business, and receive a contribution if any are made for year 4, because she has met all all three participation requirements .

I have converted the Explanation of the PPA (JCX-38-06, a pdf file) to a Word file. See attached (393 pages). PPA_of_2006_JTC_Technical.doc

SCP, maybe (see below). See Section 6.10(5) of the EPCRS (Rev Proc 2006-27) for overcontributions. Correction under this section generally requires the participant's consent (for trustee or custodia) to have funds disgorged (adj. for earning) from IRA. It might also be possible to leave the funds in the IRAs and pay a fee (10%) under section 6.10(6) and loose the deduction as well for the excess elective contributions. The employer will have to determine which of the two possible EPCRS approaches is better and whether the fix would be any better if Code provisions alone (a third approach) were used to correct the failure. Legal fees aside, the third approach would probably be more costly, especially if several years are involved. As one practitioner put it, conflicting and interrelated correction methods have to be resolved to find the fix that best serves the needs of the employer. The facts presented do not seem to indicate that the failure was egregious (see Section 4.11), however, SCP is only available for a SEP if the failure was insignificant (see Sections 4.01, 8.01). See Section 8 "factors" to determine whether the failure was insignificant. See EPCRS: EPCRS - Rev. Proc. 2006-27

It couldn't hurt to adopt it and provide for it's termination as of the date the plan was originally terminated.

Confirmed. Regadless of whether the SEP is an ERISA plan or wife's wages are exempt from FUTA, the SEP is subject to the stringent participation rules of Code Section 408(k)(2). [iRC 408(k)(1)] SEP contributions, when made, must be allocated to "each [eligible] employee" in accordance with the plan's allocation formula. Assuming the wife is an "employee" she must be treated as an employee for plan purposes. There are no provisions under the SEP rules that permit an individual to "opt out." Perhaps the business could unionize its shop and thereby exclude the wife in accordance with plan provisions. The "opting out" issue is covered in Q 2:40, and more exlicitly in Q 5:4 of the SIMPLE, SEP, and SARSEP Answer Book (11th ed).

Generally, the discretionary contribution made in 2006 for 2005 makes the individual an active participant in 2006, and if a contribution is made for 2006 (ant any time), the individual is also treatede as an active participant the following year (2007). Do you have any additional thoughts on why a BoD resolution would change the contribution from "discretionary" to "required" for active participation status? A BoD resolution does not necessary mean that the contribution must be made.

As for the Trial Judge and T.C. Summary Opinion 2006-58, the Judge was playing games. There were no documents; the Judge interchanged the terms SEP and SIMPLE. There is no indication that any of the DOL rules were ever addressed by the parties. The case cannot be cited as precedent. It might have been a ploy to get some of the income tax penalties reduced, abated, or eliminated. In any event the SIMPLE-IRA must be the exclusive plan; it wasn't, it never existed. Since the IRS is accepting PLR and EPCRS requests instead of issuing guidance we may never know the answer to this (especially as it affects a self-employed individual or partner in a partnership). It would be unwise to rely too heavily on the 401(k) regulations regarding an extension of the 30-day-or-earlier deposit requirement under 408(p); the only plan section that contains a deposit-timing rule. DOL rules aside (and they do generally apply), the code is more restrictive. The 401(k) regulations do not apply to SIMPLE IRAs. Consider however -- * Notice 98-4 states "... otherwise would have been payable to the employee in cash" approach." [Q&Q G-5] * FAQs on SIMPLE on IRS site (Reirement Community tab) confirm "January 30th" * Publication 590 also supports the "... otherwise would have been payable to the employee in cash" approach." [see page 10.] * Publication 590 also appears to support deductions "in the tax year with or within which the calendar year for which the contributions were made ends," although there is a time limit for elective deferrals. [Also on page 10] This leaves open the possibility of disqualification (or an EPCRS correction). There are no deduction carryforward provisions (as there are for SEPs). Clearly some definitive guidance is needed. Hope this adds to the body of knowledge.

The most that can be deducted AND excluded from the participant's income cannot exceed 25% of taxable compensation (excluding elective other than catch-up deferrals) or $44,000 (plus catch-up contributions of up to $5,000) for 2006. The deductible limit could be higher (because elective deferrals do not reduce compensation upon which the 25% deduction limit is computed). Hope this helps.