Gary Lesser

Thanks Denise.

The employer could establish a SIMPLE IRA for 2005, although the 60 day-period will extend into 2005. The employer could dicontinue the plan and adopt a 401(k) plan effective in 2006. The 401(k) would not be treated as a successor plan insofar as the Simple IRA is concerned.

No. An eligible employee (including an owner) may not opt out.

This is not a VCP issue. There are no defects, just a small overcontribution; correctible under plan provisions. Thus, no diminimis amount. Read document/explanation of "Excess SEP Contributions..." (page 4 of Model Form 5305A-SEP). Regarding the EPCRS -- The National Employee Savings and Trust Equity Act (NESTEG; S. 2424), which has broad bipartisan support, would direct the IRS to improve the EPCRS correction program for small employers. The corrections procedures currently applicable to SEP (and SIMPLE IRA) plans are, in some ways, impractical and unworkable because they assume that an employer has control over assets in the account, which is not the case. [see discussion in Appendix P--Sample Application for Compliance Under Revenue Procedure 2004-44, part B (page P-4)]

From the qualified plan yes. But from the SIMPLE IRA to the qualified plan within 2 years is not an "eligible rollover distribution" and would be subject to either the 10- or 15-percent penalty if under age 59-1/2.

Maybe, but this is a SEP and the qualified plan discrimination rules are inapplicable to the SEP (the SEP stands, or fails, on its own).

There is no diminimus amount. If less than $100, however, it is taxable in year of deferral. The making of a nondeductible contribution (in and of itself) is not a plan defect. Have any limits (other than deductible limits) been exceeded?

The 25% limit does apply. The contributions can not be returned to employer. If DB established, there will probably be an nondeducible contribution subject to penalty tax (until corrected/used up). The nondeductible SEP/SARSEP contributions may not be able to be used up and the penalty apply forever; but it may be worth it.

No, you need employer cooperation.

The employee must be notified of Excess SEP Contributions to avoid the 10 percent nondeductible contribution penalty tax. The employee sd remove excess with any gain (loss) by April 15 following year of notification (treatd as an IRA contribution on next day). If less than $100, the excess is reported in the calendar of notification (no diminimis amount -- ). The plan document instructions should provide you with more specific information. The notification letter (if presented to trustee) will assist them in coding the corrective distribution properly.

If the employers are part of a controlled/related/affiliated employer, as those terms are defined in the code, then all employees of all such entities have to receive the same formula allocation. The fact that there are separate plans means nothing (but possible problems). If they are R/C/A, then the plan that has the most libral eligibility requirements and highest allocation controls (since all employees have to be treated as if employed by a single employer).

If elective contributions are made the individual is treated as an active participant for IRA contribution deduction purposes. If no elective (and no employer contributions were made) then the individual is generally not treated as an active participant. However, if the participant was not an active participant for last year because employer contributions were made after end of year (and no elective were made during year), then participant is treated as an active participant this year. Hope this helps.

Are you suggesting that the contribution is required by some agreement or contract? If so, then there may be a contract issue (and the employees may be a third-party beneficiaries of the contract). Are you suggesting that the 5 entities are controlled/related? If so, the contribution to the plan (whoever makes them) must be allocated to all eligible employees in the group in accordance with plan provisions. It is highly unlikely that the SEP itself requires a contribution, but that doesn't mean that the employer can avoid a contract or agreement to make a contribution. That is a matter of state law.

Sounds like a SIMPLE plan (maybe a SARSEP, with a 3% across the board contribution based on compensation, and not based on elective deferrals). Either way, the Department of Labor (EBSA Division) should be notified. Never hurts to send a copy the IRS, National Office, Employee Plans Division, in Washington D.C. However, the employer would be a whole lot smarter if it availed itself of the plan correction programs offered by the IRS and DOL first(!). See primarily, Revenue Procedure 2003-44 at (link): Rev Proc 2003-44 IMO, it's never advisable to tell employer (or anyone for that matter) that letter was sent. People get fired for all sorts of reasons. See following link: ERISA Enforcement (and address) Generally, lost earning will be restored at a reasonable rate (unless Sponsor is able to determine actual investment results). Generally, a SEP or SIMPLE has no earning rate applicable to the plan as a whole. [see section 6.10 of above cited Rev. Proc.] Hope this helps.

As of the first day of the plan year in which the eligibility requirements (age, service, and compensation) are satisfied, to wit, 2004. [iRC 408(k)(2), ........ "satisfied" ... "for a year" ....] The regulation contain an example in which an employee that turned age 21 on December 31, participated as of the first day of the calendar plan year. Compensation is not prorated.

SEPs and SARSEPs do not permit matching contribution. Only elective and nonelective employer contributions are permitted to be made into a SARSEP. Is this an elective SEP (SARSEP)? Were the employee elective deferrals not timely deposited? Please explain (more detail).

While not dispositive of the issue, page 8 of Publication 590, regarding contributions to IRA, states: I have always believed that "there is no such thing as negative compensation." However, when the businesses are not "separate and distict" some commentators have expressed concern that netting is required. If there were SE gains and losses from more than one unrelated entity, I do not think that netting is required, although the loss would have to be taken into account in computing the 1/2 of the SE tax deduction under Code Section 164(f) in computing the EI for the plan of the gain entity. Where the plan is adopted by by both entities (as the facts may have suggested) or the entities "controlled/related/affiliated," netting (on second thought) may be required. Little guidance exists on this issue. The plan probably is silent as to "losses" from SE, but probably does state that NESE is "compensation." I have not found any PLRs on point.

Yes, even if DB not terminated. If DB not terminated, employer must use a prototype SEP that allows for its adoption (e.g., a prototype that is not a word-for-word adoption of a model SEP).

Yes, but if an employee fails to establish the account timely, then the entire plan could fail. Best to establish accounts on behalf of the "missing or uncooperative" employees.

Only the amount paid on Form W-2 would be treated as compensation in a plan of the Sub-S. Self-employment losses from an unrelated entity should not reduce W-2 compensation for QP or IRA contribution purposes (see later post). Dividend income, Sub-S or otherwise, may not be treated as plan compensation.

Bird, you are correct. No it does not (the reduction to the $41K limit under IRC 402(h)(2)(B) only applies to HCE participants in integrated SEP).

Simply stated, "Yes." (A) There are several reasons why there are no articles on the exact point (x/1+x) you mention. (1) It just doesn't work in an integrated plan (see "unproof" below). There are no step-rate equivalencies. So why write an article! (2) Even if it did work, it would presuppose you knew the 1/2 of the SE tax deduction, which you wouldn't until after the non-owner contribution (or rate) was known. Since you are generally designing a plan around an owner's maximum (or specified amount) that approach doesn't work. (B) For example, I.L. $87,900. After all reductions (except for his or her own contribution), the owner has $100,000 of remaining earned income for 2004. The formula is 10%/15.7%. Under the "percentage" or "4-step" methods the owner gets: $9,239.15 (($90,760.85 x .10) + .057 ($100,000 - $9,239.15 - $87,900)). UNPROOF: (.10/1.10 x $87,900) + ($12,100 x .057/1.057) = (.090909 x $87,000) + ($12,100 x .05392621) = $7,990.90 + 625.51 = $8,616.41 WHICH DOES NOT EQUAL $9,239.15. QED © Hope this helps. I truly didn't understand how everything worked, in operation, until after I built my integrated software. I could always understand the rules, but could never find (back-in to) the result I wanted without some optimizing functions; there are just millions of combinations. Several integration levels could produce the same participant allocation, but only one of them costs the least (and so on). I learned everything, well almost everything, I know about integration from Larry Starr. He once gave a course at ASPA called "Sole Proprietorship and Partnership Compensation and Deduction Issues," Eastern Regional Seminar (1995). I learned about the reduction to the $41,000 limit from David Baker in the BNA treatise he wrote many years ago. And that's all I ever needed to know! My original (an inadequate) understanding of integration came while I was a Tax Law Specialist/Attorney with the EP/EO Division of the IRS (1974-1980). Moe, with that in mind; most of what I know (see above; read: "learned since birth") is contained in the SIMPLE, SEP, and SARSEP Answer Book. [10th edition available shortly.] Spreadsheet-type software (with optimization and solve-for functions) is the only solution. Hope this helps you to understand the error of your ways.

BIRD IS CORRECT. Once assured that "ultra net earned income" is in excess of $200,000 (as indexed). The calculations can be performed on any "corporate-type" software program. In fact, once the "ultra net EI" number has been crunched in QP-SEP Illustrator or in Bob Garrels program (the only two programs that I know of that provide the correct answers) the ultra net earned income can be entered (up to $200,00, as indexed) into a "corporate" administrative software and the plan, thus, administered. A footnote can be used to explain why the amount of "net" compensation entered was reduced. If anyone would like to try my 2003 or 2004 software--QP-SEP Illustrator, please send an e-mail to me at QPSEP@aol.com; subject line: "Software." It is 8.4 Meg in size. IT IS NOT PROVIDED FOR DISTRIBUTION. Bob Garrel's, see above, also has a demo available at his web site. Bird, the only article on the subject "Earned Income in Plan Design Is More Comples Than Meets the Eye" appeared in the Journal of Taxation of Employee Benefits (May/June 1994, Vol 2, No. 1). Sent me an e-mail with your name and address and I'll send you a copy. [it wdn't fax well.] Incidently, the worksheet gets even funkier when catch-up contributions are used. Try a SE with $15,000 in compensation. You'd be surprised by how much of a contribution can be made. The worksheet, among several defects, doesn't take the IRC 402(h) limit into account, doesn't mention that it is not suitable for an integrated plan, the reduction to the $40,000 (for 2003) SEP/HCE limit when integrated, or the contribution limit under IRC 401(d). Also, have you ever notice the definition of compensation (on page 4) for allocation purposes and the election that can be made? Now look at the model and prototype SEPs. Go figure.

The x/1+x formula does not work in an integrated plan unless all employees earn compensation that is not in excess of the TWB. The examples in the Publications are essentially useless when ultra net compensation falls below the $200,00 limit or the plan is integrated. Circular and inter-dependent formulas are needed with many iterations. For example, it takes 15 iterations to fully solve-for each integration level. That's about 1.3 million (circular and interdependant) calculations. Also note that the $41,000 limit is reduced if integrated. When the amount to be allocated to employee's are known the contribution allocations can be performed by hand. When the plan is designed around an employee, or is integrated, only spreadsheet software can optimize the intended results. For 2003, with pre-plan EI of $200,000 and W-2 income of $30,000 and $90,000. Plan integrated at $87,000 (owner gets maximum at lowest cost, see below). [To favor owner and highest paid employee, use an I.L. of $8,700).] Contribution - $59,956.56 (Base percentage of 22.5163790% and using a 5.7% spread at an I.L. of $87,000): Owner's EI: $200,000 - $32,465.91 (Cont) - $27,190.65 (e/ee cost) - $7,708.05 (SET) = $132,635.19 (assuming no unrelated SE gains/losses). Owner gets $32,465.91. Employees get $6,754.91 and $20,435.74.

You are mainly correct. Wise choice (about the book), but wait. The new 10th edition of the SIMPLE, SEP, and SARSEP Answer Book will be available in late November. The book can be ordered by calling 800-638-8437. The AICPA has a book called The CPA's Guide To Retirement Plans for Small Businesses, that INCLUDES software for preparing illustrations. See, AICPA's CPA Book Link--with software Aspen's SEP Answer Book Link 1. Would the eligibility have to be set at "having performed services in 2 of the previous 5 years" to get the 2 owners in (3 out of 5 would keep them out for 2004, correct)? Yes (yes). Would the minumum wages have to be $0 since they were not paid in 2002? No. The minumum wage limit of $450 is a current year requirement only. Owners appear to earn at least $450 and wd therefore participate for 2004. Also, if 2 out of 5 is correct, would that mean the 4 new p/t people will not enter until 1/1/2006? Correct, assuming they earn at least $450 (as indexed) for 2006. 2. Assume all of the p/t people work less than 1000 hours. Can the employer terminate the SEP after 2005, start a PS or 401k in 2006 with a 1 Year of Service/1000 hour eligibility requirement, and have everyone excluded other than the 2 owners? Assuming the SEP termination is effective for the 2005 CY, then YES. 3. I believe 415 applies to SEP's so if they contribute $3,000 each to the IRA, they can receive up to a $38,000 employer allocation each in the SEP? Is this correct? Annual IRA contributions do not reduce the otherwise applicable $41,000 limit, but participation in the SEP is likely to eliminate the deduction for IRA contributions. Regardless, a Roth IRA may be a better alternative. 4. Employer also uses around 20 leased employees from a hospital. These employees are covered under the hospitals DB plan. I think the ER reimburses the hospital for all wages and benefits including the DB plan. Do these leased employees have to be covered in the SEP? Because of the leased employees, a (non-model) prototype or individually designed SEP wd have to be used. Either way, the leased emplyee's are treated as the S-corporation's employees unless certain rules are met, the plan contains such provisions, and the employer elects (if an option) to exclude those employees. One of the rules, however, require that the lessor contribute at least 10 percent of compensation to a "money purchase pension plan." A defined benefit pension plan, regardless of the benefits provided, does not meet the coverage exception. Also, leased employee's can not can not constitute more than 20 percent of S-corporation's NHC employee's workforce (as it would seem to do here). Note: if the leased employees are also the S-corporation's common-law-employees, then there is no exclusion available under the leased empoloyee rules. See IRC 414(n) 5. Finally, can the company borrow from the 2 owners to fund the SEP? Sure, if they got the cash or can pledge a loan to the S-corporation. Hope this helps. Also, consider an integrated SEP.