Gary Lesser

The owner must participate in the SEP if eligible. If over age 59-1/2(or another exception applies), he or she can immediately remove the funds. Sad, but true. Hope this helps.

It is my understanding that the following states do not conform to the IRC for HSA purposes at this time (but see posts below): 1. Alabama (doesn't use Federal definintion) 2. Arkansas (doesn't use Federal definintion) [Now Conforms, see below] 3. California (HSA legislation likely in 2005, failed 2004) 4. Kentucky (doesn't yet conform) 5. Maine (may have an add back provision) 6. Massachussetts (now conforms, see discussion below) 7. Minnesota (doesn't yet conform) 8. Mississippi (doesn't yet conform) 9. New Jersey (doesn't yet conform; but does have exemption for Archer MSA) 10. Pennsylvania (now conforms, see below) 11. Wisconsin (doesn't yet conform) //END LIST//

It is my understanding that the following states do not conform to the IRC for HSA purposes: 1. Alabama (doesn't use Federal definintion) 2. Arkansas (doesn't use Federal definintion) 3. California (HSA legislation likely in 2005, failed 2004) 4. Kentucky (doesn't yet conform) 5. Maine (may have an add back provision) 6. Massachussetts (doesn't yet conform) 7. Minnesota (doesn't yet conform) 8. Mississippi (doesn't yet conform) 9. New Jersey (doesn't yet conform; but does have exemption for Archer MSA) 10. Pennsylvania (doesn't yet conform) 11. Wisconsin ( (doesn't yet conform) //END LIST// I have posted this message separately for responses and have closed this topic - GSL

I'm not sure it's such a windfall . In the case of an employee who IS an eligible individual [HERE they're not], employer contributions (provided they are within applicable limits) to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. [sO HERE, not excludable] The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. [sO HERE, it is subject to.....]. There is also an excess contribution in the HSA that needs correcting and the gain removed may be subject to the additional 10% penalty tax (unless used for QMEs). [see IRC Secs 3231(e)(11), 3306(b)(18), and 3401(a)(22); Notice 2004-2 Q&A 19] Hope this helps.

Your analysis IS correct (but there is guidance). In the case of an employee who is an eligible individual, employer contributions (provided they are within applicable limits) to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employee's HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions under Code Section 213. See IRC Secs 3231(e)(11), 3306(b)(18), and 3401(a)(22); Notice 2004-2 Q&A 19.

Yes, $2000 + $600 (or $2,000 + $1,200 if both age 55 by CYE).

Yes they can. And the SIMPLE-IRA would not be treated as a successor plan (under the 401(k) rules).

If you were truly not notified of the penalty provisions, or led astray by a "professional" or financial institutions, there may be remedies available. In this case, most would cost more than the penalty (PLR ruling request). However, you could always attach an explanation to the tax return (I'd have it professionally prepared). Ouch. Unfortunately, most distribution request forms provide information about the penalties, and it might be difficult to argue that you didn't know about them. That being said, perhaps there is a reason/situation as to why you never saw/understood the explanation.....(penalty abatement for reasonable cause)...and it would be unconsionable to deny you relief. Good luck.

If you would have otherwise have received a contribution (such as a nonelective employer ("P/S") contributions to a SEP, or a top-heavy contribution to a SEP or SARSEP) from your employer for the plan year (generally the CY), your leaving before the date the contribution is made would not affect the fact that if a contribution is made you'd get your share. Be sure the employer/trustee has your current address for notices (and so on). Hope this helps.

All that would be needed to fix this oversight would be to eliminate Code Section 402(h)(2), and redisignate subparagraph 3 to subparagraph 2. Hopefully this same Congressperson would not vote for the LSA/RSA/ERSA changes that would eliminate SARSEPs (and several other plan types) from existance under the "one-plan-fits-all" rule.

No. But it would be a good idea to notify the trustee or custodian that no further contributions will be made if the plan is to be terminated. The employees must also be notified of the discontinuance (according to DOL/EBSA and IRS publications). Hopefully, the "2005" notices were not provided (other than to notify them of the discontinuance)! It probably is NOT a good idea to rollover the Simple IRA into a 401(k) if the new plan is a Simple 401(k). A SIMPLE 401(k) plan may only receive elective and matching contributions under Code Section 401(k)(11)(B)(i)(III). IRS model language may suggest otherwise, but the Code speaks clearly. Also, each participant must satisfy the two-year rule separately. Hope this helps.

The SEP is not considered in 401(a)(4) testing of the qualified plan. The SEP is not top-heavy if the only eligible employees are key employees. However, the SEP may be part of an aggregation group if a key employee is a participant; in which case, a top-heavy contribution may have to be made to all eligible non-key employees in the aggregation group. [iRC 416(g)(2)] Hope this helps

Incidently, it may also be a good idea for the adopting employer to notify the trustee/custodian of the termination and that no further SEP contributions will be made. Do not terminate until after it is fixed. Thereafter, the SEP-IRAs will be treated as IRAs unconnected with a SEP. Request for updating sponsor's SEP documents will also likely be discontinued. Employees should also be notified of the discontinuance. Hope this helps.

You can terminate the SEP "on" the date you terminate it. Contributions for current year are probably discretionary. You might be able to use the voluntary correction procedures in Rev Proc 2003-44 for those that missed prior year contributions. Unless the error is egregious, IRS approval may not be necessary. Essentially, contributions will be made adjusted for any gain (other requirements must also be satisfied). A "reasonable" rate of interest is generally used in the case of a SEP.

IMO, it would be foolish to rely on the agent's answer; especially when an amendment to a prototype SEP would solve the problem. I would suggest that client get a ruling. The order in which the two plans are adopted should make no difference (under current law). Whether the SEP exists is a more important matter. If it doesn't, then none of the SEP contributions are any good and the 401(k) correction itself would cause additional problems. Plan document provisions should be followed. Both plans need language for coordination and the model SEP doesn't contain such language. I would interpret the model document's language to be applied on either a plan year or fiscal year basis. SEPs can be very unforgiving. Is it really worth the risk?

I question the accuracy of the answer received from the EP Specialist (as well as the Specialist's authority in this matter). The model document is clear as to when it can be used. If a qualified plan is maintained, the model SEP is not a suitable document. Without a suitable SEP document, there is no SEP. The excess is in the SEP. IMO, all SEP contributions made for the year are excess contributions that should be treated as "wages" for all purposes (e.g., FICA, FUTA). As a more practical solution (for the current year), why not just adopt a SEP prototype that does not contain such a restriction. To the extent of identical participation, the P/S deduction is reduced by the allowable deduction. Thus, remaining elective and more employer contributions cd be placed in the 401(k) and the QP limits (contribution/deduction) reached. Even assuming the word "currently" is applied to the moment, rather than the plan year; it makes no sense that the order in which the two plans are adopted would make any difference or have any different effect. Prior rules prevented a model SEP from being used when the e/er maintained a terminated DB. That language was dropped because all QP language had to contain coordination provisions (see LRMs). The language that remains in the model is the language that is--and not much can be done about it. I would wonder too, whether the alternate DOL reporting and disclosure rules would apply, or whether the SEP would be subject to full blown disclosure (SPD, and so on). Honestly, I would not rely on the Specialist's answer--the explanation doesn't really support the agent's conclusion.

Just expanding on above...... If the contribution were made, the employee would have to deal with the excess (also reported in box 1 of Form W-2). Small price to pay for tax-santioned SEP status.

The IRS would, unhesitatingly, invalidate the SEP. ALL eligible employees must receive nonelective contributions if any are made. Opting out is not permitted (regardless of the reason). So, if the IRA could have been established on a deductible basis, I imagine that the employee would have accepted the contribution as a "gift from G^d!

If the employer has any leverage with the custodial organization it should excercise it. If employer has its accounts with same institution, a cross-eyed glane will usually work. :angry: The account can be established with a different trustee or custodian. Many mutual fund complexes waive the minimum initial investment for "related" accounts or when contributions are required to be made. The accounts must be established and the contributions made to the plan for the plan to pass muster for the plan year involved.

That's correct. However, if the plan is integrated (as it probably should be), the $41,000 component is reduced by the integration spread multiplied by the lesser of (a) the integration level, or, (b) the employees compensation. [iRC 402(h)] Note, that the 25% deduction limit may be higher than the amount that can be allocated on an excluded basis. Best to determine this limit first and only allocate that much (plus catch-ups). The deduction limit is based on CY compensation that ends with or within the plan year. Most other computations are based on compensation for the plan year. Hope this helps.

Yes, the catch-up is what's left after all other limits have been addressed. As I see it, the catch-up is in addition to the 25% exclusion limit/the 100% limit/and the $40,000 (as adjusted) limit. So, elective contributions that remains after the ADP test, up to the $3,000 limit, may then be treated as deductible catch-up contributions.

The matching contribution can be deposited into any SIMPLE IRA (assuming that a DFI is not being used). A bank would probably establish the account. If the employee is unwilling to establish account or can not be located, the employer can establish account on employee's behalf. If contribution not made, then the Simple is not a Simple for the year and all 2004 contributions are excesses (generally reported in Box 1 of Form 1099 (for 2004), or not deducted if SE). To avaid the possibility of double taxation, the excess should be removed before due date of individual's federal income tax return. Hope this helps.

If the Canadian Royalty Trust is purchased in a US exempt trust (like an IRA) AND the product is debt-financed, then UBI would result (subject to the $1,000 annual limit). The product's disclosures should address suitability and discuss the UBIT issue (if debt financed). Hope this helps.

The simple IRA excess contributions (caused by the 2004 adoption of a QP) are included in Box 1 of Form W-2 (or not deducted in the case of a SE individual) to avoid the 10% penalty on nondeductible contributions. The excess (including gain/loss) should be removed from the SIMPLE IRA by the participant's return due date to avoid the possibility of double taxation under IRC 408(D)(5). Any distributed gain is taxable. The excess can not be rolled over or transferred to anything since it is not an eligible rollover distribution. It can not be returned to the employer. [it is unclear whether the nonelective amounts included on Form W-2 are subject to FICA/FUTA in the case of a common-law employee.] Here, the excess amount will be treated as EI and subject to SE tax. Whether the "excess" amount contributed (that is included on Form W-2 or not deducted if SE) is treated as 401(k) plan compensation is to be determined by the definition of "compensation" found in the new QP. Hope this helps.

If an entity is tax exempt, it has until the due date of its Form 990 (generally, the 15th day of the fifth month following the close of its accounting period) to establish a SEP (but not a SARSEP) arrangement. Contributions made before the Form 990 due date can generally be treated as made for the prior year to either a SEP or SIMPLE IRA.