Gary Lesser

Also see Publication 560 (page 4) that permits an election to use unreduced compensation for allocation purposes. If so, for 2004, nonintegrated and 125 percent SARSEP test satisfied, and with employees getting a 6.443184 percent contribution resulting in $100,000 pre-plan (after reduction for non-owner contributions), I get a 402(h) limit of: $13,000 + $3,000 + $5,642.22 (e/er; 6.443184% of $87,568.90 [$100,000 - $5,642.22 (e/er) - $6,788.88 (SET)]) = $21,642.22 (2004 Total) $100,000 - $6,788.88 (SET) - $13,000 - $5,642.22 = $74,568.90 $74,568.90 x .25 = $18,642.22 Note: catch-up contributions do not reduce the base upon which the IRC 402(h) limit is computed. [iRC 414(v)] $18,642,22 + $3,000 = $21,642.22

None. Your interpretation is correct. If funds left in IRAs, the 6 percent penalty would apply untill corrected (by removal or undercontribution). Even if the SEP plan year were changed to the taxpayer's fiscal year, the CY deduction rule would still apply to limit the deduction.

You may need an IRA trustee or custodian that will accept real estate (or an option to buy) as an asset. Fees will be higher and an annual valuation will be required. If property mortgaged, then IRA might have sme UBTI. You raised no indication of a prohibited transaction, but that too is a possibility. If nearing RMD period, be sure there are enough liquid assets to make RMDs. Hope this helps. Do you have any specific questions?

Employers can not make an accross the board "elective" contribution. If you mean that the employer made a 6 percent of compensation contribution to all eligible employees under a separately adopted SEP then there would be a problem if considered compensation exceeded the $200,000/$205,000 amount. Please advise (the facts), and perhaps the "Board" can help you further.

Do you mean a 6 percent employer contribution to a SEP and employee elective under a SARSEP? Or, did all eligibles elect 6 percent? Employer's can not make "elective" contributions on "behalf" of employees other than by (under) a valid salary reduction agreement. I believe that each plan must be separately tested for discrimination. Combined limits would generally apply under 415 and 402(g). The SEP contributions reduce the otherwise applicable P/S deduction (plus elective) limit on a dollar for dollar basis.

If the qp has provisions to accept such contributions they can be transferred to the qp. Current year SARSEP contributions can't be rolled over until after the employer provides the req'd notice or (generally) March 31, 2005.

Can't see how to deduct early. The contribution made for the 2004 plan year are deductible on the 2004-2005 fiscal year return. Won't there be a final return filed at a later date on which to claim the contribution deduction?

Self correction under the EPCRS may be possible. But the amount is not deductible if paid after the extended due date until the following year (assuming all limits are otherwise met in that year). Special rules apply if a SARSEP. Generally, the restorative payment has to include earnings (if no earnings rate is known, then a reasonable interest rate may be used). See Rev Proc 2003-44, Sec 6.10(4) and Sec 8 (regarding self-correction if failure is insignificant).

Appears that the plan year is the CY. If so, yes; but the "2004" contribution will be deductible on the tax return (due Novemeber 2005) rather than on the August 31 return (due Novemebr 2004). The limit for the 03-04 plan year is $40,000; $41,000 for the PY starting in 2004. Somewhat less if the plan were integrated. The plan appears to be nonintegrated. If so, contributions can be made at any time. Generally, no problems when based on year to date earnings.

The compensation measuring period is the calendar year. In how many CY preceeding 2005 did employee earn the compensation requirement (not to exceed $5,000) and whether or not consecqutive? For current year, "reasonably expected," is not a defined term. The SIMPLE, SEP, and SARSEP Answer Book, Q 14:58 (9th Ed) states the following:

Maverick, I believe that Rev Proc 97-9 can be followed (the 401(k) plan distributions can be rolled over to a 401(k) SIMPLE). It is my understanding that the Service does not consider the rollover to be a "contribution" for purposes of IRC 401(k)(11)(B)(i)(III). The plan must be amended to accept such contributions. Why not just amend the existing plan into a 401(k) SIMPLE? Thornton, it should be noted that a SIMPLE IRA is not an eligible retirement plan for purposes of receiving a rollover (except from another SIMPLE IRA). [iRC 408(d)(3)(G)]. Hope this helps.

There shouldn't be a problem--415(e) no longer exist! However, there may be deduction issues under IRC 404(a)(7) depending upon when the DB plan was terminated and contributions made to ther plans.

Appelby, Absolutely (upon distribution). However, in the case of a section 408(d)(5) correction (after return due date), wouldn't box 2a have to be the same as box 1? Double taxation yes, but it doesn't seem like 6 percent penalty applies (in the case of a SIMPLE IRA). BTW, Delelict, it might be better to say that the SIMPLE IRA did exist--it was established/adopted and contributions were made (although it never satisfied the exclusive plan requirement).

Although it does sound good, i'm not so sure that merely terminating the SIMPLE IRA will be sufficient. Deduction issues aside, it might be better to amend the plan's FY to the CY first and then terminate it effective 12/31. [see SEP LRMs (first note to reviewer, March 2002) regarding changing the plan year, reproduced below.] There being no guidance on this issue, a PLR request should be considered by client. In general, the plan year is either the CY or FY, but the LRM suggests that there could be a short plan year IF the plan is amended.

I agree that no 1099-R reporting is required. The amounts contributed should be reported in boxes 1, 3, and 5 of Form W-2. The "excess" amounts in the SIMPLE-IRA should be removed (adjusted for gain/loss) by participants before the due date under IRC 408(d) to avoid double taxation that might result if corrected later under IRC 408(d)(5) AND to avoid the 10 percent nondeductible contribution penalty. Either way, the 6 percent penalty does not appear to apply.

Yes. Yes. No. Yes. Amend to prototype this year and discontinue contributions effective 2005. The new employees (formally of B) will not be eligible until 2005 (assuming a service requirement is imposed). The 401(k) may have to be amended to permit company A's employees to participate upon adoption (if the plan has a service requirement). No transition relief available for SARSEP.

If the other plan was maintained during the same year, then there is a problem that a prototype document would solve. It is unlikely that employees of B would be eligible to participate in the SARSEP for 2004 if there is a service requirement. Also, the SARSEP is grandfathered, why get rid of it? The employer may have also grown to the point where elective contributions may no longer be permitted under the SARSEP. I have assumed that "A" and "B" are not related, controlled, or affiliated employers. Any contributions made under the SARSEP eat the otherwise applicable P/S limit deduction limit under Code Section 404. Elective contributions made to SARSEP need to be considered in 401(k) plan under Code Section 402(g). Hope this helps.

(1) can the local union sponsor a SEP (it appears that only "employers" may sponsor SEPs and the local union is not technically an employer)? It may be an employer eligible to adopt a SEP, but only eligible employees of the union may participate. Perhaps the union can be "involved" in the formation of a group trust (or group IRA trust) for employers to make contributions into. The local union could establish an IRA trust into which SEP contributions made by employers could be made. (2) assuming the local union can sponsor a SEP, can eligibility be restricted to decorative sheet metal workers (i.e., the small subgroup of union members which at the moment consists of 10 to 12 individuals)? The eligibility rules applicable to SEPs suggest to me that all employees except for those who satisfy prescribed list of exclusions must be covered by the SEP. True. Eligibility must be extended to all employees that satisfy age, service, and compensation requirements, in any are specified in the plan. Unionized employees may generally be excluded, but not covered exclusively. (3) finally, assuming (1) and (2) are not problems, different participants will work on different projects at the same time and the participants working on Project A may receive a larger contribution (based on their Davis-Bacon pay) than participants working on Project B. This differential seems to violate the uniform contribution requirement. It also seems problematic that only Davis-Bacon pay will be taken into account in determining the contribution as opposed to W-2 pay. Keeping in mind that (1) and (2) are problems. If discrimination does not result, a private letter ruling might permit. IRS has approved SEP contributions based on an hourly rate (Ltr Rul 8224019) that was not discriminatory. Hope this helps.

Online Version of Inte-Greater Software Becomes Available I am happy to announce the availability of the online version of The Inte-Greater, a program that David Baker wrote for the DOS operating system about 13 years ago. It finds the integration level for a corporate-sponsored profit-sharing plan that results in the greatest share of the employer's contribution for one or more 'favored' employees (e.g., the physician who owns his or her professional corporation that also employs several staffers). Give it a whirl! https://benefitslink.com/cgi-bin/inte-greater/

Although W-2 income is not EI (for a SEP or QP) or NESE (for a SIMPLE). The issue of whether the individual is classified correctly has not been addressed. Dual status may also be possible. If the person is a statutory employee (see IRC 3508; and the individual wd have to be exclusively paid based on sales or output) then they are also an independent contractors (sole-proprietor) and can establish a plan to the extent they have earned income or NESE. A statutory employee is not subject to FICA (and in some cases FUTA), and generally make estimated tax payments. I do not believe this individual can be classified as a statutory employee (does not fit into one of the four classifications). Being paid on a W-2 could be incorrect if the individual is SE. If self-employed, the amounts are not subject to federal income tax withholding or social security taxes. You might wish to check out the IRS Audit Guidlines and the 20 factor test of Revenue Ruling 87-41. For an excellant treatise, see, Derrin Watson, Who's the Employer, chapter 2 (www.employerbook.com).

Not in this life. All employees of the controlled group must be consided for eligibility purposes. See IRC 414(b) and ©.

Generally, the excess caused by insufficient EI is treated as reported earned income (taxed). Thus, it isn't deducted. In your case it was deducted. Assuming the due date has passed, it would seem that the 10 percent penalty would apply (See Form 5330). Doesn't appear too large a penalty would result so as to justify anything more than a routine penalty abatement request (not that anything other than VCP comes to mind, but I don't see that VCP would accomplish much and probably be more costy than the penalty) attached to the return.

Does a common-law employee currently participate in the plan? If not, did a common law employee ever participate in the plan? If so, the plan is covered by ERISA (except PBGC parts). If no current CL employees (but previous ones) the answer is less clear ("are they participants covered under the plan"?). See ERISA Section 3(2)(A) and DOL Regulations Section 2530.3-3. If covered, alternate reporting rules may apply to a model or prototype SEP document.

The sponsor of the discontinued plan must notify the adopting employers and the Service of the discontinuance of the plan. So, to the extent of the discontinuance-- From Rev Proc 2000-20: ..."The adoption agreement must also contain a statement which provides that the sponsor will inform the adopting employer of any amendments made to the plan or of the discontinuance or abandonment of the plan." From Rev Proc 89-13 (NOW OBSOLETE) APPENDIX 1. PATTERN NOTICE THAT MAY BE USED TO NOTIFY EMPLOYER THAT ITS PLAN WILL BE TREATED AS AN INDIVIDUALLY DESIGNED PLAN NOTICE To: (Name of Employer) On (date plan was adopted) you adopted the (name of plan) regional prototype plan. As of (date of discontinuance), we have discontinued our sponsorship of the plan as adopted by you. The purpose of this notice is to advise you that if you are continuing to maintain the plan and have not replaced it with another approved regional prototype plan or an approved master or prototype plan, the plan will be treated by the Internal Revenue Service as an individually designed plan. As a consequence, if it becomes necessary to amend the plan because of a change in the law or because of regulations or other guidelines issued by the Service, you will not be entitled to continue to rely on any determination letter you received from the Service as to the regional prototype plan's qualified status (or, in the case of a standardized plan, on the notification letter we received). In order to continue such reliance, you must obtain a favorable determination letter as to the qualified status of the individually designed plan. (signature) date) 2. PATTERN NOTICE THAT MAY BE USED TO NOTIFY EMPLOYER ANNUALLY AS TO WHETHER SPONSOR CONTINUES TO BE A SPONSOR, WHETHER ANY AMENDMENTS HAVE BEEN MADE, AND, IF AMENDMENTS HAVE BEEN MADE, WHAT REQUIREMENTS MUST BE SATISFIED FOR RELIANCE NOTICE To: (Name of Employer) On (date of adoption) you adopted the (name of plan) regional prototype plan sponsored by us. The purpose of this notice is to advise you that, as of December 31, 19 -- , we are continuing our sponsorship of the plan and that [the plan has not been amended in the year ending on that date.]/[the plan has been amended as follows in the year ending on that date: (describe amendment)). The requirements that you must satisfy in order to be able to continue to rely on any favorable determination letter you received from the Internal Revenue Service as to the plan's qualified status (or, in the case of a standardized plan, on the notification letter issued to us) are set forth in section 14.04 of Rev. proc. 89-13, 1989-7 I.R.B. (signature) (date) 3. PATTERN NOTICES THAT MAY BE USED TO NOTIFY KEY DISTRICT OFFICE AND ALL ADOPTING EMPLOYERS THAT SPONSOR INTENDS TO DISCONTINUE SPONSORSHIP OF PLAN NOTICE To: Chief, EP/EO Division _________ Key District This is to inform you, in accordance with section 14.05(5) of Rev. Proc. 89-13, 1989-7 I.R.B. , that we intend to discontinue our sponsorship of the regional prototype plan as of ____, 19__. The plan was approved by you on ____, 19__, by notification letter number _____. (signature) (date) NOTICE To: (Name of Employer) This is to inform you that, as of ___, 19__, we intend to discontinue our sponsorship of the (name of plan) regional prototype plan, which you adopted on (date of adoption). If you continue to maintain the plan and do not adopt another approved regional prototype plan or an approved master or prototype plan to replace it, the plan will be treated by the Internal Revenue Service as an individually designed plan. In that case, if it becomes necessary to amend the plan because of a change in the law or because of regulations or other guidelines issued by the Service, you must obtain a favorable determination letter from the appropriate key district office in order to have continued reliance as to the plan's qualified status. Hope this helps.

Your interpretation is correct. If the SEP and PS contributions are deductible in the same taxable year, however, the PS contribution deduction amount is reduced by the deductible SEP contribution amount.