Gary Lesser

It is my understanding that the following states do not entirely conform to the IRC for HSA purposes [AS OF JUNE 30, 2005] 1. Alabama 2. California (see following posts) 3. Maine 4. Massachussetts 5. Minnesota (see following posts) 6. New Jersey 7. Pennsylvania (see next message) 8. Wisconsin (see prior post) //END LIST//

Yes, provided the business's tax year ends on June 30th. Assume CY, but NO contributions have been made to the P/S plan for the 2005, still possible. In other cases, no. [No overlapping contributions for CY under the exclusive plan rule.] Hope this helps. [Ooops, see clarification below)

Because the 50 percent rate requirement was not met, ALL elective deferrals are disallowed deferrals. Notification to affected employees is required (see page 4 of model plan document). The elective portion of the plan no longer exist for the year and assuming no employer contributions, the plan is not treated as top-heavy for the year. The disallowed deferrals are included in box 1 of Form W-2 (and arguably subject to FICA/FUTA). Disallowed deferrals are not treated as SEP contributions. Now, forget the SARSEP (unless nonelective contributions have been made, in which case further discussion will be needed). Employer now adopts a QP. Follow the rules in the QP and forget that you had the SARSEP. Hope this helps. If employer nonelective contributions were made and the plan is top-heavy the model plan requires that a contribution be made to a SEP (i.e., this SEP, or another SEP of the employer). A prototype plan (which could be adopted as an amendment may allow for the employer to designate which plan (including a QP) is to receive any required T-H contribution. Hope this helps.

A 401(k) would probably be more effective than the SEP. The SEP could however be amended into an integrated SEP. Owner could make additional contributions to the extent of compensation above a certain level. If the TWB is used, the excess compensation (not in excess of the $200K +COLA limit) would be multiplied by 5%. If employees got 5.7%, the excess compensation could be multiplied by 5.7% (the limit). If a prototype SEP is used, the employer could maintain both plans. The 401(k) deduction limit is reduced by SEP contributions of participants in the SEP that also are eligible to participate in the 401(k). A 5% contribution would satisfy the SEPs top-heavy requirement. Hope this helps.

If that is what's required for the distribution, then you are correct. Breakpoints aside (e.g., if mutual funds), what difference would it make what participants do with their distributions (e.g., including IRA to Roth conversions)? Perhaps a J&S annuity?

In general, the SIMPLE IRA contribution amounts are to be included on Form W-2 (in box 1). Participant's can remove timely (with gain, which cd be negative) or be taxed twice. If the simple is being terminated the financial institution and participants should be notified of the termination. Letter from employer may also help participants remove funds from the trust/custodial account. The participant may have to "explain away" why the 10/25% penalty tax doesn't apply (if applicable). Unless entire account is attributable to excess contributions, note that some institutions calculate "earnings attributable" and others don't. Since correction under the Code is possible (EPCRS not needed). Nothing to indicate any problems with prior years; thus okay. No deductions for 2005 (including owners, e.g., if self-employed). That, plus inclusion on Form W-2 (whether or not actually distributed/removed by participants adjusted for earnings) would appear to avoid the nondeductible contribution penalty tax. Hope this helps.

A SEP is not a successor plan. Generally, participants may roll over distributions from the QP to the SEP-IRA.

TERMINATING THE PLAN (from a DOL publication)

It is not the insurer's responsiblity to verify that the amounts distributed from the HSA are tax-free withdrawals. Neither can an insurer require that an HSA make disbursements for qualified medical expenses (or any other expense) for that matter.

Yes. IRC Section 219(f)(3).

Yes. IRC Section 219(f)(3).

Bird, aside from 401(k)(6) being sufficient authority, I think we almost agree. But I'd rather be safe (get a PLR). If there was no discrimination [408(k)(6), I believe], the employer could possiby get a plan provision approved that allowed all current employees to participate or that provided a rolling eligibility scheme. Rolling eligibility (as you suggest) is not explicity prohibited. But neither is it explicity allowed.

Bird, do you have anything that supports your scholarly opinion? From the SIMPLE, SEP, and SARSEP Answer Book (10th Ed)

Rolling eligibility could result in operational discrimination if new employees are added to the employer's workforce. I do not recall seeing any "approved" prototypes that would allow all current employees to participate, while requiring future employees to satisfy a more stringent eligibility requirements.

More facts or an explantion may be needed. All sole proprietors are self-employed individuals (but the reverse is not always true). Seems like he is still in business!

Although directors do "manage;" the function is not one "historically performed by employees, including partners or sole proprietors in the case of an unincorporated business." See Committee Reports accompanying IRC 414(m)(5). See also Rev. Proc 2000-6. That being said, at professional meeting the IRS has indicate that directors are performing management functions. In Q 13:16 of Who's The Employer, Derrin Watson suggests "[g]iven the confusion" that directors wishing to set up a plan request a determination letter on their ASG status.

The unwanted SIMPLE-IRA contributions are not "excess" contributions that may be removed without penalty; neither can they be recharacterized. Arguably, if you file Schedule Cs AND are under extension, you could adopt a SEP for 2004 and make a small contribution that would invalidate the SIMPLE IRA plan; thus converting the "unwanted" contributions to "excess and nondeductible contributions." Amounts attributable to the "excess" should also be removed from the SIMPLE IRA. Earnings withdrawn will generally have to be included on the amended 1040s. You will likely have to explain away the imposition of the withdrawal penalty tax (if applicable and reported (coded) by trustee).

Proposed Treasury Regulations Section 1.408-7(d) which utilizes the "at least 3 of the immediately preceding 5" years (the "3-5 rule") was published on July 14, 1981. The Code provisions applicable to SEPs were created by the Revenue Act of 1978 (also utilizing the "3-5" rules) and were effective for tax years beginiing after 1978. It is possible that the client was using a plan intended to be a prototype plan. Was it amended by sponsor? Was it approved (have a copy of "notification letter" approving plan)? If not, the plan may have been bad from the start. If so (was IRS approved), the plan would be okay, at least until it would have had to be amended (generally, 12/31/87 or shortly after approval by IRS of amended prototype); see Announcement 87-20 (below). You might wish to contact the plan sponsor's compliance department. Copies of plan documents (regarding "determination and notification letter requests') are available under applicable Code provisions (see IRC Sec 6103) and the Freedom of Information Act.

Generally the trustee/custodian has reserved the right to resign. What does the documents say in regard to this event? Generally, they will make a distribution, but provide notice that the Simple IRA funds can generally be transferred or rolled over to another Simple-IRA (or after two years to a traditional IRA).

I agree with JEVD for the same reason (i.e., contribution made during window period). However, it does not appear to be a catch-up contribution for 2005 (just a regular elective until determined otherwise at end of year).

Since the contribution was made by the individual to a SIMPLE IRA it is an excess contrbution and should have been removed before the due date (adj for gain/loss) of the Federal return to avoid double taxation (if paid after that date). The 6% penalty tax does not apply to a Simple IRA. Employer contributions can not be recharacterized. Rollovers from a traditional IRA to a SIMPLE IRA can be recharacterized. I do not believe that the excess contribution that were made from personal funds of the owner can be recarachterized. Publication 590, page 26, states:

The best approach (to avoid the 6% and 10% annual excise taxes on the excess) would be to file an amended tax return (not claiming the deduction) and to remove the excess from the SEP-IRA (adjusted for gain/loss if after the due date).

In my experience, under EPCRS, the IRS generally will require that there be some "consequences." The method proposed (i.e., amending the plan to "3" years as it was administered) offers no "consequences." Aside from agreeing to amend the plan to "something more than zero and less than three years," the same fix does not have to cover all years. All years could be corrected per Code, but might be aggregated into a single year if done under the EPCRS. You will also find that the procedures for SEPs under the EPCRS are somewhat flawed. Incidently, it doesn't really matter what name the failure is given. They failed to follow plan provisions, they have reasons for doing so, and now ask for correction. Self-correction or anonomous correction might also be possible, but would probably be more costly. If the SEP was a SARSEP, or if the plan is top-heavy it gets a bit more complicated and there are several competing procedures available. They all have to be analyized before the most appropriate method is presented to IRS (e.g., disgorge later years, and fix earlier years (sob story needed here!)). If the contributions have not been made for 2004 and the employer is under extension, it may be possible to amend the plan for 2004 contribution purposes. Remember too, that the employer would generally have to been able to select 3 years when the plan was INITIALLY adopted to change it to 3 years (to prevent discrimination if new employee's perform service).

Yes; they treated as a rehired participant. Their participation (if they choose) would start as soon as practical (they do not have to wait until following year or next entry period).

You might try PenServ, Inc at (215) 444-9812.