Gary Lesser

bmurphy, (1) Did the existing deferral forms that everyone received include the bonus payments in what could be deferred under the plan? It doesn't have to specifically state "bonus." If so, and next item satisfied, a payroll reduction payment seems practical (up to any maximum specified per pay period). (2) Was the bonus election that was signed by the ED consistant with the 60-day notice? If, not, there may be an overpayment by the ED. In which case, future deferrals could possibly be decreased (to coinside with original election) to make up for this inadvertant error.

Under the EPCRS the operational failure gets fixed, but the "the excise taxes and additional taxes"..."are not waived merely because the underlying failure has been corrected or because the taxes resulted from the correction." See Rev Proc 2003-44, Sec 6.09. That being said, there is no harm in asking for such relief since it is a Code penalty. I do not believe that the $50 penalty under Section 6663 is an excise tax (??), so you may have a shot. You might want to utilize the anonymous (Mary Doe) submission procedures. In all likelyhood, the EPCRS examiner or approval reply will not mention the penalty tax (so I'd get any waiver in as part of the correction being approved). Most employers wouldn't fix the problem, even fewer would pay the penalty tax.

In general a notice has to get to the intended recipient. Posted notices are not always sufficient. What may be practical for a small employer may be impractical for a large employer. The issue is probably more of whether the mode of distribution is going to get it out to those that need (or are required) to know something and whether it came across. The employer's election notification does not appear to require that it be in writting, but an undocumented verbal notification provides absolutely no assurance that it came across (or for that matter, ever provided to employees). The fact that everyone is passing up a 100% match is testament to that. A video presentation would have been better. Many firms require that their employee sign and return their election form, even if the choose not to participate. OTOH, if a fair cross section of new and old nonowner employees elected to participate, then the 408(p)(2)©(ii)(II) verbal notice is ARGUABLY good Moe, "unofficial alternate method..." refers to the SIMPLE "Summary Description" under DOL regulations (see above post quote) rather than a full blown "Summary Plan Description" otherwise required for a Title I plan under ERISA.

Here's the law-- SPJPA Sec 1421(d) MODIFICATIONS OF ERISA.-- Note that (from below) "3) EMPLOYEE NOTIFICATION.--The employer shall notify each employee immediately before the period for which an election described in section 408(p)(5)© of such Code may be made of the employee's opportunity to make such election. Such notice shall include a copy of the description described in paragraph (2). Did the verbal notification include a "copy" of the description provided bt trustee/custodian?

The failure to notify affected employees could be corrected with a $50 per day penalty payment. I believe the penalty starts on the day the 60-day Notice sd have been provided. I would see Rev Proc 2003-44 regarding interest rates and the voluntary correction methods that are offered "without" service approval. The DOL/EBSA also has an online calculator that may provide "reasonable" interest rates. The employee would have little to complain about. Assuming there are no other failures, the plan goes on. The amounts paid would be deductible on the next tax return of the business. The affected employee should be given their notice (and an apology), along with some amended W-2s showing active participation. The elective portion would have to be reflected on the appropriate years W-2 (and i'm not sure which year that is at the moment, but probably 2005, with the appropriate code). See Form W-2 reporting instructions. The 2005 version is available. A letter of instruction (contribution year /amount /interest ) may be helpful when remitting the amount to the trustee/custodian, especially if the corrective distributions exceed the general $10,000 limit for any one year. If the employee made deductible traditional IRA contributions thre may be other issues. It's all I can think of at the moment; hope this helps.

If the error is timely reported by the employer (details help), the financial institition will generally make "correcting" entries. Otherwise, make the necessary contribution and report amount on participant's W-2 (as wages) for the year. It would help to inform the employee that a prohibited excess contribution was "deemed" made to his SIMPLE IRA and should be corrected. Perhaps the employee will return the funds or the the employer will likely offset the amount from future wages.

FWIW, the DOL/IRS in a joint project wrote a publication called "Simple IRA Plans for Small Businesses." It refers to the Simple-IRA "Summary Description" as a "document" which is consistant with DOL regulations. In addition, it states that the employee must receive an "annual election notice." In any event, unless it can be proved that a "proper" summary description and "proper" annual notice were provided timely (since an unofficial alternate method was chosen), there is (IMO) no notice. There is also a $50 per day penalty that would appear to be applicable.

If the partner's made the contributions with their own funds, then all contributions are excess contributions and should be corrected under the Code. The problem can also be corrected under the Code if fixing isn't an option. Employees may have to pay a 6% penalty, until corrected. The amounts are treated as drawings and partners take no deduction. The employer may have to pay a 10% penalty. Depending upon the amount involved, correctiona after the due date may have to be spread out over more than one year. See IRC Secs 408(d)(4) and (5).

You are correct, an employer may have only one SIMPLE-IRA plan. Each institution may want a copy of the plan document. If they accept the account as a SIMPLE-IRA then the employer is okay. In many cases, they will accept contributions under a model plan provided they do not object to or have their own "add-on" language.

The notification and timing rules are designed to provide all employees with a "meaningful opportunity to participate." I do not believe that this occurred. Is there a video of the notice, a transcrript, or some other evidence that it was issued and all of the notice requiremets were met? Even, so, it may not have provided a "meaningful opportunity to participate." I do not believe that a "oral" notice can satisfy these complex rules.

Were contributions made by the individual partners from their own assets or made by the partnership?

In general, I agree with Appleby's response. The deferral election form could differentiate between regalar and bonus wages for deferral purposes. Assuming it didn't, the bonuses would likely be treated as compensation under IRC 6051 and deferrals made out of such amount. Since the owner didn't execute a deferral election form, his or her contribution to date are excesses (see below). If the plan permits additional election periods he could join the plan with respect to compensation not yet received. If the owner is self-employed, the deferral form can be executed any time (e.g., 12/31/05) if in accordance with plan provisions because his/her earned income is treated as earned on 12/31 (although the amount might not be known until a later date). Hope this helps.

Although SIMPLE IRA plans are established with the intention of being on-going, the time may come when a SIMPLE IRA plan no longer suits the business’s purposes. In a joint IRS/DOL publication, the IRS and DOL stated that to “terminate a SIMPLE IRA plan, notify the financial institution that you will not make a contribution for the next calendar year and that you want to terminate the contract or agreement. You must also notify your employees that the SIMPLE IRA plan will be discontinued. You do not need to give any notice to the IRS that the SIMPLE IRA plan has been terminated.” No further guidance is provided. [iRS Pub 4334, Simple IRA Plans for Small Businesses, p 5 (Sept 2004)] It would appear that the termination amendment must conform to the notifications provided for the plan year, therefore the termination can not be made effective until January 1, 2006. If an employer (or predecessor employer) previously maintained a SIMPLE, it may establish a SIMPLE only effective on the following January 1. [Notice 98-4, Q&A K-1, 1998-2 IRB 26] Thus, the November 1 notification deadline must be met if a new SIMPLE is adopted. Hope this helps.

Pennsylvania: Governor Rendellybelly Signs Health Savings Measure Stripped of Tax Breaks for Contributions Interest income earned by health savings accounts and withdrawals used to pay for eligible medical or dental expenses will be exempt from Pennsylvania state personal income tax, under legislation (H.B. 107) signed by Gov. Edward G. Rendell (D) July 14. Contributions to the accounts will be taxable, as a result of a last-minute Senate floor amendment. Earlier versions of the bill would have allowed employers and individuals to deduct contributions to health savings accounts from their income subject to the state personal income tax. The legislation extends state tax breaks to health savings accounts that comply with the federal tax code, which requires them to be coupled with a high-deductible individual or group health insurance policy. Those policies have an annual seductible of at least $2,000 and require out-of-pocket expenses of up to $10,000 for a family before comprehensive health insurance coverage begins to apply. The Pennsylvania Health Savings Account Act will be effective 60 days after enactment and apply to taxable years beginning after Dec. 31, 2004. It specifies that distributions from health savings accounts that are not used for the qualified medical expenses of the beneficiary, as well as any excess contributions, will be taxable. The Pennsylvania Chamber of Business and Industry said it is disappointed that the Legislature did not extend the same special tax treatment to health savings account contributions that they receive for federal tax purposes and vowed to make the issue a priority when state lawmakers return from their summer recess. "While we note that the concerns of insurance companies have been addressed by ensuring compliance with the federal health savings account law, we are extremely disappointed that the small business community's needs were ignored," Jim Welty, vice president of legislative and corporate affairs for the chamber, said in a statement. Welty said the savings from making the interest on health savings accounts tax-free is negligible compared to tax savings that could have been realized had the contribution exemption remained in the bill.

Two books on HSAs will be released shortly, as follows: Health Savings Account Answer Book (Aspen Publishers) Advisors Guide to Health Savings Accounts (AICPA). I expect that both books will be released within the next 60 days. Both books are similar in scope, but the "answer book" is written in Q&A format.

Appleby, you are probably correct as a SIMPLE IRA must be maintained on a CY basis and the periods would overlap. So, assuming the PS plan was maintained for the PY ending in 2005, 2006 would be the first year that a SIMPLE IRA cd be maintained. OTOH, if no contributions (other than rollover, transfers, and forfeitures that do not replace required contributions) were made to P/S plan for the PYE in 2005 then a SIMPLE could be maintained for 2005. [Notice 98-4, Q&A B-3l

The $50 penalty would appear to start on the day the 60-day notice should have been provided for the 2004 year (generally) on Nov 1, 2003) and on Nov 1, 2004 for the 2005 plan year. [Notice 98-4, Q&A G-3] As of July 21, 2005, the panalty is $44,500 ($50 x 628 days + $50 x 262 days). Arguably, the plan is valid. Unless the employer would be willing to make restorative contributions and 3 percent matching contributions (with interest on both) on behalf of all eligible employees, I doubt that EPCRS would be helpful. I don't think that "reasonable cause" can be established for this failure (most likely "egregious"). Correction under the EPCRS would however, eliminate the $50 per day penalty and legitimitize the contributions previously made. OTOH, if the plan was not properly adopted (appropriate boxes and blanks not completed or not executed by employer), then the contributions are all excess contributions. It may take several years to correct the 2004 error without having to pay tax on the distribution because the correction amount is in excees of the amount specified in Code Section 408(d)(5). Note that the amount in 408(d)(5) is increased for SEP, but not SIMPLE, contributions. If a deduction was taken for the owner's contribution, then there can be no correction (so, amend the 2004 Form 1040 first, then start the correction process for 2004). The 2005 contribution can be corrected under Code Sectioin 408(d)(4) by removing it and any gain (positive or negative). Obviously, if the plan was considered adopted, then this approach doesn't work. The 10 percent penalty for making nondeductible contributions would lilely apply to the 2004 contributions. The 2005 10-percent penalty can be avoided by including amounts on W-2 or by not claiming deduction if self-employed. Now for the good news (possible double taxation aside), the excess does not apper to be subject to the 6 percent panalty tax (see below), since a SIMPLE IRA is not a "traditional" IRA. See Form 5329 instructions. FWIW, Congress never wrote any excess contribution rules for SIMPLE IRA other than to state that a SIMPLE IRA is an "an individual retirement plan under section 7701(a)(37)" that also satisfies additional requirements. [iRC Sec 408(p)(1)] This oversight is most likely the reason the IRS seems hesitant to provide any guidance. Publication 590 does not provide any additional guidance on excess SIMPLE contributions.

While I agree with the logic of your conclusion, the rules remain unclear. I think your client would be taking a chance. What does the trustee/custodian have to say about this? If the rollover turns out to be a taxable event, the distribution from the simple IRA of the deceased spouse, may also be a taxable event. Your client would not want to pay taxes twice; and that is the likely result (absent additional guidance). I truly believe the law is inadequate and the IRS is in a difficult situation trying to make up rules. If the two year rule is satisfied with respect to the spouse's simple IRA, the spouse could consolidate her simple IRA and her inherited simple IRA into a traditional IRA. If I were to make up rules, they would be the same as the IRA rules (and the 2-year rule would only apply to the original owner).

"Generally," the same distribution (withdrawal) rules that apply to traditional IRAs apply to simple IRAs (according to the IRS in Pub 590). Death distributions are reported with Code 4 (death) rather than Code S (early distribution), regardless of the two year period. Ever wonder what "generally" means since a simple IRA is an IRA but it is not a "traditional" IRA? It is not absolutely clear that a surviving spouse can roll over a simple distribution into another simple IRA since a simple IRA is not listed as an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of Code Section 402©(8)(B). [see IRC 408(d)(3)(A)(ii); but see IRC 408(d)(3)(G)] The answer may hinge on whether the spouse (initial spouse) is treated as owner or simply takes a distibution. It should also be noted that no contributions may be made to a simple IRA except "under a qualified salary reduction agreement." That being said, we will have to wait until the IRS see's fit to make up some rules that Congress wasn't too clear on. Hope this helps (some). See also respnse of "danmar" above.

I don't think that the IRS intended any change in this regard, but we may have to wait for guidance (which will be forthcomming) on the matching/nonelective contribution issue. Keep in mind that the IRS has stated (verbally) that a contribution of one cent more than is allowable invalidates the entire arrangement for the year. [iMO, that is not the result.] The guidance will be issued none too soon! Any excess is not deductible on the self-employed's Form 1040 (and included in box 1 of Form W-2, if a CLE--see W-2 instructions) and the amount should be removed from the IRA. Beyond that the rules are very merky. For example, the 6% excess contribution penalty applicable to excess contributions to traditional IRAs do not seem to apply to a SIMPLE IRA. If left in the IRA what happens? IMO, Congress erred in not providing for the return of excess contributions OR the traditional IRA excess rules apply (IRC 408(d)(5) and (d)(6)--see IRC 408(p), a simple retirement account means an IR plan as defined in section 7701(a)(37). It also erred in not making simple IRAs subject to the 6 percent penaly. Personally, I think the IRA rules apply (and Congress needs to make excess subject to the 6% penalty). As I said, we need more guidance (and getting it is not likely). Hope this helps.

Code Sections 408(k)(2)© [sEPs] and 408(p)(4)(B) [sIMPLE IRA] allows nonresident aliens that have no US source income to be excluded. Thus, US citizens or residents who work for the parent and nonresidents aliens that have US source income will have to be covered (if otherwise eligible). See, Derrin Watson, Who's The Employer?, Q 9:10. Who's the Employer-LINK

It is my understanding that the IRS will be issuing more guidance on this subject. The guidance will likely treat such set asides as coming from a partner's drawing account (which may or may not be treated as earned income when the books are settled). I do not think that the IRS interprets the new regulations so as to prevent partners from setting aside elective amounts throughout the year. It will be interesting to see if matching/nonelective amounts can be contributed before a final "earned income" determination is made.

Failure of the SARSEP to meet the 50% rule has the effect of nullifying the existance of the SARSEP arrangement for 2005. This is true. The plan has notification requirements with explanations. FOLLOW THEM. Failure to do so is an addditional penalty. The elective amount is, however, reported in box 12 of Form W-2. Eventually (but not yet), the excess will turn into a traditional IRA contribution; until then it is just a "disallowed deferral." Arguably, reporting the "disallowed deferral" on Form W-2, box 1, will avoid the cummulative 10% nondeductible employer contribution excise tax. Client will formally terminate sponsorship of the SARSEP and can establish the Safe Harbor 401(k) plan for the remainder of 2005. Yes, but why not for all of 2005. The 2005 402(g) limit, plus any catchups, is not reduced by the disallowed deferrals. I'M NOT SURE TOO SURE ABOUT THAT......and don't believe the issue has really been addressed anywhere. The plan is still described in Code Section 408(k) and the amounts were elective contributions when made. You might want to post this query in the 401(k) message board. Hope this helps.

Bird, can you locate the recent info mentioned in your prior post. It should also be noted that if the individual quits an excess could result. Elfman, will the maching contributions be allocated to all employee's or, if in accordance with plan provisions, just the owner's account in advance?

So now we know how the IRS doesn't think. Using total compensation would seem the more acceptable approach (next to shedding his/her associates). Hope this helps.