Gary Lesser

In most cases, a SEP an ERISA covered plan. It is also subject to the PT provision under the Code. Under Section 4(a) of the Employee Retirement Income Security Act of 1974 (ERISA), the only employee benefit plans subject to Title I of ERISA (regarding the protection of employee benefit rights) are those within the meaning of ERISA Section 3(3), provided such a plan is established or maintained by an employer engaged in commerce or in any industry or activity affecting commerce, by an employee organization or organization representing employees engaged in commerce or in any activity affecting commerce, or by both. The term employee benefit plan includes an "employee pension benefit plan." [ERISA § 3(3)] Most SEPs and SARSEPs are employee benefit plans under ERISA; however, many exclusions and exceptions apply. SIMPLE IRA plans are subject to special rules (see chapter 14). Section 3(2)(A) of Title I of ERISA defines the term employee pension benefit plan as follows: [A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program i. provides retirement income to employees, or ii. results in a deferral of income by employees for periods extending to sthe termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan. Plans without employees are not covered under Title I of ERISA. [DOL Reg. §2510.3-3] Thus, for purposes of Title I, the term employee benefit plan does not include any plan, fund, or program under which only a sole proprietor or only partners are participants covered under the plan. An individual and his or her spouse will not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, that is wholly owned by the individual or by the individual and his or her spouse, and a partner in a partnership and his or her spouse will not be deemed to be employees with respect to the partnership. It is unclear, however, whether a limited liability company that is treated as a partnership for tax purposes and that has no common-law employees is excluded from coverage under Title I. Example: Puck establishes a SEP for his sole proprietorship. Puck and his wife, Mookie, are the SEP's only participants. A third employee is ineligible to participate for the current plan year. Puck causes his SEP IRA trustee to unwittingly purchase a piece of real estate as an investment for the IRA that Puck indirectly owns. Although the plan is exempt from Title I of ERISA, the transaction is, nonetheless, a prohibited transaction under the Code (see Q 4:18).

Example 1. In 2006, a plan which otherwise qualifies as an HDHP provides family coverage with a $2,100 deductible for each family member. The plan pays 100 percent of covered benefits for each family member after that family member satisfies the $2,100 deductible. The plan does not provide any express limit on out-of-pocket expenses. The maximum out-of-pocket expense limit for family coverage is $10,500 ($10,200 for 2005). The plan is not an HDHP for a family with six or more covered individuals because the amount that these individuals pay in out-of-pocket expenses exceeds the maximum out-of-pocket threshold under Code Section 223 ($2,100 X 6 ($12,600) exceeds $10,500). However, the out-of-pocket expense limit of $10,500 for any family with two to five covered individuals is not exceeded because the amount that these individuals pay in out-of-pocket expenses would not exceed the maximum out-of-pocket threshold under Code Section 223 ($2,100 X 5 ($10,500) equals, but does not exceed $10,500). [i.R.S. Notice 2004-50, Q&A 20 (ex. 1), 2004-33 I.R.B. 196] Example 2. In 2006, a plan which otherwise qualifies as an HDHP provides family coverage with a $2,100 deductible for each family member. The plan pays 100 percent of covered benefits for each family member after that family member satisfies the $2,100 deductible. The plan includes an umbrella deductible of $10,500. The plan reimburses 100 percent of covered benefits if the family satisfies the $10,500 in the aggregate, even if no single family member satisfies the $2,100 embedded deductible. The out-of-pocket maximum ($10,500 for 2006) is not exceeded and the plan qualifies as an HDHP for the family, regardless of the number of covered individuals. [i.R.S. Notice 2004-50, Q&A 20 (ex. 2), 2004-33 I.R.B. 196] Source: Health Savings Account Answer Book (chapter 3), 2nd Edition, Aspen Publishers (in Press). The HSA Contribution Limit Chart is attached. COLA_HSA_06.pdf

Saabra, if the model is not used according to its terms, the SEP plan is not able to use the alternate (read: "simple and easy) participant disclosure rules under the DOL regulations. So, to avoid having to operate in a very grey area of SPD and notificion design, the employer might consider amending the plan to a prototye if adopting a 401(k) for the same year. The plan administrator should be made aware of any SEP contributions made for the year. Also, if the plan is not used according to its terms, the plan has a "qualification failure" that would need to be corrected. [see Rev Proc 2004-44] Hope this helps.

The 401(k) would invalidate any previosly established SIMPLE IRA for the year. All contributions (now excess contributions) would be reflected in box 1 of Form W-2. The excess should be removed in accordance with traditional IRA rules. [see IRC 408(d)(7)(B), referring to 408(d)(4) and 408(d)(5)], However, the SIMPLE IRA excess does not appear to be subject to the 6 percent excess contribution penalty tax (even if returned after the due date). Hope this helps.

Roger, The formula would be the similar for earlier years (but start off with "15" instead of "25"). The 25 percent exclusion limit (previously 15%) was not amended to use "gross" compensation (as the deduction limit was). No official reason has ever been given for this intentional "oversight." At the time, I brought the matter to the attention of Bill Sweetnam. It was determined to leave the exclusion limit basd on "includable" compensation. The formula (among others) come from the SIMPLE, SEP, and SARSEP Answer Book, 11th Ed., Aspsen Publishers. See chapters 10 and 11.

The plan can be amended, provided the amendment is consistant with the notices given before the plan year began. Here, no notice or notices [two are required] were distributed. Arguably, there is no SIMPLE IRA plan for 2006 at this moment or the election period hasn't yet started. [There may be a $50 per day penalty for failure to give the required notice(s).] On the other hand, contributions to a 401(k) plan would invalidate the SIMPLE IRA plan for 2006 (regardless of whether the proper notice(s) were given).

Assuming an X percent employer contribution to a SEP, the following formula can be used to determine the maximum elective deferral. Catch-up contributions may be made (and deducted) in addition to the amount determine under the 25 percent exclusion allowance. 25 - X (e/er contribution rate) --------------------------------------- = 1.25 25 - 10 ---------------- = 12 percent (maximum elective w/o catch-up) 1.25 Proof: $10,000 x .12 = $1,200 (plus catch-up contributions (up to $4,000) if applicable) .25 ($10,000 - $1,200) - (.10 x $10,000) = $1,200 Note: The employers 25 percent deduction limit (based on aggregate compensation) may be higher than the amount that can be excluded under IRC 402(h) which is based on includible compensation. So, the above approach can be used to find the maximum excludible elective amount. Catch up contributions are not subject to the exclusion limit. Thus, the $1,200 amount may generally be increased by the catch-up limit for the year. So, assuming no deductions or offsets to the $10,000 (unlikely if paid on a W-2) the catch-up limit ($4,000 for 2005) would allow an additional $4,000 to be contributed as an elective catch-up deferral. Note: Elective contributions must give way employer contributions which must be uniform (integration aside).

Consider placing the social security/SE tax savings into an investment account. Therein lies a plan.

In number 2, if there was such a policy (HDHP), the employer could buy it. I don't think such a policy currently exists in Hawaii; so option 3 (self-insured) seems to be the only option.

Can an employer make the same HDHP/HSA available to its employees in Hawaii as is available in other states? Proposed Answer for Discussion and Comments (see below). Does everyone agree? Generally no. The state of Hawaii has a unique exception from the preemption provision of ERISA that allows it to regulate directly the terms of ERISA health plans, including self-funded plans. ERISA § 514(b)(5). Hawaii’s Prepaid Health Care Act (“PHCA”) requires employers to provide health benefits to Hawaii-based employees who are employed at least 20 hours per week for 4 consecutive weeks. Haw. Rev. Stat. §§ 393-3(8), 393-4, 393-11. In addition, the PHCA also sets forth various requirements concerning plan benefits and cost-sharing. Haw. Rev. Stat., ch. 393. Accordingly, an HDHP offered by an employer in Hawaii, whether self-insured or insured, must satisfy the requirements of the PHCA. An employer in Hawaii essentially has three options in deciding how to satisfy the PHCA's benefit requirements: (1) the employer may buy health insurance coverage that has already been pre-approved by Hawaii Department of Labor and Industrial Relations (“DLIR”); (2) the employer may seek DLIR approval for a health insurance policy not yet approved by DLIR; or (3) the employer may seek DLIR approval for self-funded plan coverage. At present, there are not yet any pre-approved HDHP/HSA products available on the Hawaii insurance market. If an employer offers a plan that has not been pre-approved by the DLIR, it must submit an application to the state and request approval. It appears, based on informal comments from the DLIR, that in order to view the HDHP as satisfying the requirements of the PHCA, the DLIR may require significant employer HSA contributions to ensure that most of the high deductible is covered by the employer, not the employee.

In general the SEP can be amended any time up until the due date of the business tax return. However, if any contributions have already been made for the year, the mid-year change would likely cause a violation of the "uniform allocation" rules; integration with social security aside. [see. Prop Treas Reg Sec 1.408-8©] Having two active SEPs for the same year is not generally a good idea (and in addition, may also cause a cause a violation of the uniformity rule). Caution: If the HCEs (e.g., owner) could not have met the plan's new eligibility requirement at the time the plan was originally adopted, the plan may be disriminatory as a result of the "rolling eligibility." The notice explanation to employees does not have to be provided before the amendment is effective (in the case of a SEP). The plan will contain language as to what has to be provided and when.

Notice 94-4 provides that compensation "for the entire calendar year" is used. That language strongly suggests that no proration is allowed.

Sure. Nice cat.

If the C corporations establishes a CY SEP, it could make a contribution based on compensation for the 2005 CY. The C corporation (sucessor entity) will claim the entire deduction since it will be making the contribution.

The phrase "has performed service for the employer during at least of the 3 immediately preceeding 5 years" (i.e., either plan or calendar years) found in Code Section 408(k)(2)(B) would seem to preclude the use of a fractional part of a year. The rules were intended to be simplified; service perforned at any time within the year would count as service for that "year." Thus, a plan that contained a "1.5" years of service requirement would be operated in the same manner as if it said "2" years.

Social security taxes and withholding taxes would generally exceed 3 percent.

It is unlikely that the amount he would otherwise have reveived in cash (after deductions/taxes/withholding)plus a match, of say 3 percent, would exceed the original $10,000. That being said, it is possible (just unlikely to happen). Is there some situation which cd result in 100 percent being taken home on W-2 gross earnings of $10,000?

So, assuming just 50% ownership (i.e., no indirect ownership, and not part of an ASG), the entities appear to be separate entities for plan purposes and the 415 limits (when applicable) are applied separately to each plan. I always like to ask who or what owns the remaining 50 percent. I always seem to get strange answers. ?? If 50/50 how are decisions made?

In such a case, all contributions to the SIMPLE IRA become excess contributions. See older posts on this subject.

Note: An employer may amend a cafeteria plan document to enable a health FSA participant to become HSA eligible during the grace period (limited purpose FSA/Post-deductible health FSA). A new Transitional Rule is provided for "no unused contributions" situations and amendments to exclude grace period coverage to individuals who elect HDHP coverage under a "general purpose" health FSA. Notice 2005-86 follows: NOTICE 2005-86 PURPOSE This notice provides guidance on eligibility to contribute to a Health Savings Account (HSA) during a cafeteria plan grace period as described in Notice 2005-42, 2005-23 I.R.B. 1204. As discussed below, an individual participating in a health flexible spending arrangement (health FSA) who is covered by the grace period is generally not eligible to contribute to an HSA until the first day of the first month following the end of the grace period, even if the participant’s health FSA has no unused benefits at the end of the prior cafeteria plan year. This notice, however, provides guidance on how an employer may amend the cafeteria plan document to enable a health FSA participant to become HSA eligible during the grace period. BACKGROUND Cafeteria Plans Section 125(a) states that, in general, no amount is included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan. Section 125(d) defines a cafeteria plan as a written plan under which all participants are employees, and the participants may choose among two or more benefits consisting of cash and qualified benefits. “Qualified benefits” mean any benefit which, with the application of § 125(a), is not includible in the gross income of the employee by reason of an express provision of Chapter 1 of the Internal Revenue Code, including employer-provided accident and health coverage under §§ 106 and 105(b). A high deductible health plan (HDHP) as defined in § 223©(2)(A) can be employer-provided accident and health coverage. A health FSA, which pays or reimburses certain § 213(d) medical expenses (other than health insurance or long-term care services or insurance), is also employer-provided accident and health coverage. The term “qualified medical expenses” as used in this Notice, means expenses which may be paid or reimbursed under a health FSA. Cafeteria Plan Grace Period Notice 2005-42, 2005-23 I.R.B. 1204, modifies the application of the rule prohibiting deferred compensation under a cafeteria plan (i.e., the “use-it-or-lose-it” rule). The notice permits a cafeteria plan to be amended, at the employer’s option, to provide a grace period immediately following the end of each plan year, during which an individual who incurs expenses for a qualified benefit during the grace period, may be paid or reimbursed for those expenses from the unused benefits or contributions relating to that benefit. A plan providing a grace period is required to provide the grace period to all participants who are covered on the last day of the plan year (including participants whose coverage is extended to the last day of the plan year through COBRA continuation coverage). The grace period remains in effect for the entire period even though the participant may terminate employment on or before the last day of the grace period. But an employer may limit the availability of the grace period to only certain cafeteria plan benefits and not others. For example, a cafeteria plan offering both a health FSA and a dependent care FSA may limit the grace period to the health FSA. The grace period must not extend beyond the fifteenth day of the third calendar month after the end of the immediately preceding plan year to which it relates, but may be adopted for a shorter period. Interaction Between HSAs and Health FSAs Section 223(a) allows a deduction for contributions to an HSA for an "eligible individual" for any month during the taxable year. An "eligible individual" is defined in § 223©(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.” In addition to coverage under an HDHP, § 223©(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223©(2)© also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer. However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who is otherwise eligible for an HSA may be covered under specific types of health FSAs and remain eligible to contribute to an HSA. One arrangement is a limited-purpose health FSA, which pays or reimburses expenses only for preventive care and "permitted coverage" (e.g., dental care and vision care). Another HSA-compatible arrangement is a post-deductible health FSA, which pays or reimburses preventive care and for other qualified medical expenses only if incurred after the minimum annual deductible for the HDHP under § 223©(2)(A) is satisfied. This means that qualified medical expenses incurred before the HDHP deductible is satisfied may not be reimbursed by a post-deductible HDHP even after the HDHP deductible had been satisfied. To summarize, an otherwise HSA eligible individual will remain eligible if covered under a limited-purpose health FSA or a post-deductible FSA, or a combination of both. Moderator's Note: This text was posted on the IRS site (drop files), the official version in IRB may contain a correction to the second to last sentence in the above paragraph. That line should probably read "...reimbursed by a post-deductible FSA...," rather than "...reimbursed by a post-deductible HDHP..." OPTIONS AVAILABLE TO AN EMPLOYER An employer may adopt either of the following two options, which will affect participants’ HSA eligibility during the cafeteria plan grace period: (1) General Purpose Health FSA During Grace Period Employer amends the cafeteria plan document to provide a grace period but takes no other action with respect to the general purpose health FSA. Because a health FSA that pays or reimburses all qualified medical expenses constitutes impermissible “other coverage” for HSA eligibility purposes, an individual who participated in the health FSA (or a spouse whose medical expenses are eligible for reimbursement under the health FSA) for the immediately preceding cafeteria plan year and who is covered by the grace period, is not eligible to contribute to an HSA until the first day of the first month following the end of the grace period. For example, if the health FSA grace period ends March 15, 2006, an individual who did not elect coverage by a general health FSA or other disqualifying coverage for 2006 is HSA eligible on April 1, 2006, and may contribute 9/12ths of the 2006 HSA contribution limit. The result is the same even if a participant’s health FSA has no unused contributions remaining at the end of the immediately preceding cafeteria plan year. (2) Mandatory Conversion from Health FSA to HSA-compatible Health FSA for All Participants Employer amends the cafeteria plan document to provide for both a grace period and a mandatory conversion of the general purpose health FSA to a limited-purpose or post-deductible FSA (or combined limited-purpose and post-deductible health FSA) during the grace period. The amendments do not permit an individual participant to elect between an HSA-compatible FSA or an FSA that is not HSA-compatible. The amendments apply to the entire grace period and to all participants in the health FSA who are covered by the grace period. The amendments must satisfy all other requirements of Notice 2005-42. Coverage of these participants by the HSA-compatible FSA during the grace period does not disqualify participants who are otherwise eligible individuals from contributing to an HSA during the grace period. TRANSITION RELIEF For cafeteria plan years ending before June 5, 2006, an individual participating in a general purpose health FSA that provides coverage during a grace period will be eligible to contribute to an HSA during the grace period if the following requirements are met: (1) If not for the coverage under a general purpose health FSA described in clause (2), the individual would be an "eligible individual" as defined in § 223©(1)(A) during the grace period (in general, is covered under an HDHP and is not, while covered under an HDHP, covered under any impermissible other health coverage); and (2) Either (A) the individual's (and the individual’s spouse’s) general purpose health FSA has no unused contributions or benefits remaining at the end of the immediately preceding cafeteria plan year, or (B) in the case of an individual who is not covered during the grace period under a general purpose health FSA maintained by the employer of the individual's spouse, the individual's employer amends its cafeteria plan document to provide that the grace period does not provide coverage to an individual who elects HDHP coverage. EFFECT ON OTHER DOCUMENTS Notice 2005-42 and Rev. Rul. 2004-45 are amplified. DRAFTING INFORMATION *** Notice_2005_86.pdf

Only after taking into account the needs and objectives of an employer can the best plan be determined. Clearly, the safe-harbor elective limits ($15,000/$20,000) are higher than in a SIMPLE-IRA ($10,000/$2,500). Stevena1, there are a number of posts that cover the points you mentioned. Go back longer and search the forum for "safe harbor" and "safe-harbor."

Stevena1, Someone erred, the profit-sharing plan was not maintained by the employer. The requirement that "contributions were made" or "benefits were accrued" was not met; therefore p/s plan was not maintained under the SIMPLE IRA exclusive plan rules. Perhaps a related employer maintained a plan(?).

Under the EPCRS, the employer should make the required contributions (and any matches). Unless actual ernings known, a reasonable interest rate may be used. See Rev Proc 2003-44, App A (Sec .05)--Exclusion of an eligible employee.....

The attached chart (a "pdf" file) was updated for the Tax Relief and Health Care Act of 2006 (H.R. 6111) on December 29, 2006. The chart was updated to reflect the 2008 inflation adjustments announced in Revenue Procedure 2007-36 on June 5, 2007. The attached chart may be reproduced and freely distributed in its entirety by you or your financial organiation.---GSL New_Cola_2008_REV_June_2007.pdf

It would appear that any amendment must be consistant with the plan notifications for the year; thus, a termination would generally be effective no sooner than the next plan year.