Gary Lesser

Although the employers may be part of an "affiliated service group," they are not part of a controlled group under Code Section 414(b) - since there is no control with just 50%. See ASG - IRC 414(m) and (o). If neither, company 2 can have its own plan. Uness integrated, the maximum limit for 2004 is $41,000. Contributions may be based on the first $205,000 of compensation)

Although the nature of the compensation was not clearly provided, I believe this will answer the question: The earned income is netted if the businesses are controlled, however, W-2 income is not offset by negative E.I. for plan purposes. Hope this helps.

How do you (or plan sponsors that you work with) and interpret the 25 percent participant exclusion allowance under Code Section 402(h)? Facts: An individual, and the only employee of X, has pre-plan compensation of $100,000 for 2003. The individual defers $14,000 ($2,000 of which is treated as a catch-up contribution). The plan is either (a) model SARSEP (see compensation definition below that excludes elective deferrals), or (b), a prototype SARSEP that defines compensation as including elective deferrals in the definition of compensation, but also contains the LRM required 25 percent allocation limit (see LRM language below)? Are the exclusion allowances under the model and prototye determined the same?-- (1) $24,000 -- .25 ($100,000 - $12,000) + $2,000 (2) $23,500 -- .25 ($100,000 - $12,000 - $2,000) + $2,000 If method "(2)" how is Section 414(v)(3)(A)(ii) resolved? That section provides for purposes of Code Section 402(h)--among other sections covered--that catch-up contributions are not "taken into account in applying such limitations to other contributions or benefits under such plan or any such plan." If catch-up reduces 402(h) compenation, it would appear that the individual gets $500 less overall. In a sense, the employer's maximum exludible contribution is lowered by considering the catch-up in the computation of the exclusion allowance. From model SARSEP (3/2002, pg 3), it states: From SEP PROTOTYPE LRM--(3/2002, page 5), it states: From SEP Model document--(3/2002, page 1) it states: Is a catch-up contribution described in Code Sectrion 402(g)(3)? What is the result if a model SEP and model SARSEP are adopted? Which document is followed?

Assume a prototype SEP included elective contributions in its definition of compensation and allocations are made comp-to-comp. How do you or plan sponsors you work with interprete the 25% allocation limit specified (see LRM language below) in the plan--25% of compensation excluding ALL elective amounts or just excluding normal elective contributions? From SEP LRM--(3/2002, page 5) IRC 414(v) lists 402(h) as a section to which the catch-up contribution would have no effect on a limit or taken into account, as follows: So, is a catch-up elective contribution an "elective deferral described in section 402(g)(3)"? If so, it would reduce the exclusion allowance under Code Section 402(h) which it is not supposed to do..

Assume a model SARSEP is very top-heavy (see definition of compensation in model below). Does the "net" compensation definition contained in the model document require that elective deferrals are to excluded in computing the top-heavy contribution amount? If so, wouldn't that violate the 416(i)(1)(D)/414(q)(4) top-heavy rules? The model only adds back elective for purposes of the $450 minimum participation compensation requirement (but not for t/h purposes). If the employer contributed 5 percent to a (top-heavy) model SEP would the first 3 percent have to be allocated any differently than the additional 2 percent? The model SEP states that compensation doesn't include "employer contributions to the SEP..." However, unlike prototype language, it does not state that compensation "includes" elective deferrals "except where specifically stated otherwise" [sARSEP LRM #7 (3-2002)] Note:From model SARSEP (pg 3): From page 4 of model SARSEP--Top-Heavy Requirements Also consider the changes in the SEP LRM language-- NEW SEP LRM (3-2002): OLD SEP LRM (4-2000) IRC 414(v) lists 402(h) as a section to which the catch-up contribution would have no effect on a limit or taken into account, as follows: So, is a catch-up elective contribution an "elective deferral described in section 402(g)(3)"?

Correct. But if the plan is top-heavy, the contribution is not discretionary. Only contributions to that emplopyee's account are considered. But, contributions have to be allocated to all employees-so that's not possible. If that is done, the plan may not pass muster and there is no answer to your question that I know of.

I'm not entirely sure I agree with the above result (if the plan is top-heavy for the 2003 PY), or generally with the "rule" of law, as stated. Here's my take-- If, with respect to a particular plan year, no employer or employee elective contributions have been allocated to the SEP IRA by the last day of the plan year, and contributions are purely discretionary for the plan year, an employee is not treated as an active participant for the taxable year in which the plan year ends. It must be noted, however, that when discretionary contributions to a SEP for two plan years are made in one calendar year, the contribution for the later plan year is deemed to be made in the next taxable year solely for the purpose of determining active participant status. If an allocation must be made to the SEP IRA of an employee with respect to a particular plan year, the employee will be an active participant in the taxable year in which the plan year ends. For example, top-heavy minimum contributions are not discretionary—and thus an allocation must be made. On the other hand, elective contributions cause active participation for the plan year as of which the deferral contribution is allocated. Example. In 2004, but before the due date of its 2003 federal tax return, Acme Corporation establishes a SEP for 2003. Discretionary contributions are made to the SEP in January 2004 for the 2003 taxable year. Participating employees will be treated as active participants for their 2004 taxable year. If Acme also makes a 2004 SEP contribution in 2004, participating employees will be treated as active participants for the 2004 taxable year. [Notice 87-16, § I(A), Qs A-21-A-26, 1987-1 CB 446; Ltr Rul 9008056] © Source: SS&S Answer Book, Q 5:33 (9th Edition)] Thus, it is possible that required contributions could cause active participation for 2003, even though the contribution was made after the end of the plan year. If so, employer should issue amended W-2 Forms.

ALL of the facts are really neeed here, and with that in mind, if the plan is just a SEP, there is no elective plan to receive it (not a plan asset). And the amounts do not appear to be valid SEP contributions either. So, that still leaves you with a DOL problem, but not necessary a penson problem. I wouldn't discount the possibility of a crime either (e.g., theft, conversion). If there is a SARSEP, then you got DOL and IRS problems (2 correction procedures, lots of legal fees and many many penalties with competing correction procedures). But, it might not be a valid SARSEP either! Perhaps it's just a wage issue. Hopefully, it isn't a fiduciary issue? Possible crimes aside, this would be a lot easier to fix if not a pension problem. Was withholding and/or social security taxes deducted/paid on set-asides? If yes, itwould appear to be something other than elective (unless SARSEP exists). I agree with jevd, except that I'm not too sure what type of attorney or attoneys are needed. And I'd get one soon. There may be S-of-L issues that can be resolved in your favor. I don't believe for a second that employer overlooked resulting windfall. Four rules come to mind: Once you have their money, you never give it back. [FROA #1] If it's free, take it and worry about hidden costs later. [FROA #37] Employees are the rungs on the latter of success; don't hesitate to step on them. [FROA #211] SEPs and SARSEPs are very unforgiving; pray you have neither. [GSL #2].

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.

NO. I would first consider getting an automatic extension (Form 4868). Before that extension runs, File Form 2688 for an additional extension. Both Forms have instructions on when to file.

Jevd, The amounts here are not excesses 'participant' contributions, just excess nondeductible contributions. Thus, they are not treated as "excess SEP contributions" subject to traditional IRA limits. I.e., the amounts conrtributed are within applicable limits--and if it were not for the funding of the DB plan--would be deductible.

An excuse that prevents the return from being completed on time would be much better. Once the extension is granted the return can be filed (claiming the deduction) and the contribution can be made up until the extended due date.

Just an additional thought if the plan is just a SARSEP and not top-heavy. Since the repeal of Code Section 415(e), the maximum employer deduction in a combination of defined benefit and defined contribution plans—including a SEP, a SARSEP, or a SIMPLE—is the greater of 25 percent of the participant’s compensation or the amount necessary to fund the defined benefit plan. The JCWAA made a change to allow a contribution to a plan that accepts only elective deferrals not to be included in the maximum employer deduction described above. In other words, the defined benefit plan’s “contribution” for the year could exceed 25 percent of a participant’s compensation and the participant would still be permitted to make an elective deferral to a defined contribution plan (including a SARSEP that is not top heavy).

Absent a fraudulent transfer situation, the employer has no recourse to recover the contributions. However, it may be possible to delay a portion of the DB contribution to permit the deduction of the SEP carryforward and thereby eliminate the cummulative 10 percent penalty on the nondeductible contribution. If any amount (elective or nonelective, or gain) is returned to the employER, both the employer and trustee/custodian have entered into a prohibited transaction under the Code and under ERISA (if plan subject to ERISA). They may also be liable for theft, conversion, and possibly breach of fiduciary duty under state law. Hope this helps the Klingon Empire. [Nice suit. ]

Assuming the corporate return was not on extension, the SEP would had to have been established and funded by March 15. The deduction can only be claimed on the on the corporate return (and must be made by the extended due date, even if return claiming deduction filed sooner).

Doesn't appear that 415 applies in the aggregate. Individual does not appear to be in "control" of more than one entity. The limit for 2004, however, was increased to $41,000 (plus catch-ups) and the plan can consider up to $205,000 in compensation.

Yes, to the extent of compensation (generally W-2) that is the solution, but then there is still the Social Security tax issue. Will it still worth the deferral at these tax rates. For a Roth, possibly, but for a tax-qualified or tax-sanctioned plan, I'm not too sure it makes sense in most situations. Ignoring corporate deductions and federal income taxes, a person needs to earn 18 percnt more to absorb the 15.3 (combined) SS tax. With that type of an initial negative charge, an after-tax investment in a tax-deferred investment (e.g., an annuity or nondividend paying stocks) might yield better results. If there were deductions that couldn't otherwise taken against unearned income, that too would need to be considered. Gut feeling, it rarely pays; but your solution does work--Derrin's Law. His book is also available on the Internet (by subscription) as well as book form, I believe: Derrin's Site

In general, the term "earned income" means the net earnings from self-employment (as defined in IRC section 1402(a)), but such net earnings shall be determined--(i) only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor..... Rental income is gerally viewed as passive income and reported on Schedule E. By treating the amount as Earned income (if it is such) it will also become subject to SE tax. Do you do the repairs? How much income is generated from your service versus capital. Arguably, a portion might be treated as EI, but not all. Complicated area without a lot more facts. Matters of depreciation and other considerations should be discussed with your accountant.

You are correct, the self-empoyed just don't deduct the excess (the correction). Sure, the excess needs to be corrected--to avoid double taxation. If properly documented, the trustee can report this as a return of an excess amount, and not subject to the 25% penalty. Distributed gain, if any, will be subject to the 10 percent penalty, unless an exception applies. What you need is trustee/custodian cooperation.

VCP--assuming you want to keep the contributions in the accounts without the 6 percent cummulative penalty on participants. The employer will probably have to pay a 10 percent penalty (plus other fees) for it's nondeductible contribution, but probably escape the additional 10 percent fee for the Service allowing retention of the excess amounts, assuming the employer has no control of the IRA assets (which I doubt it would have). Keep in mind that the SEP portion "may be" okay (or worst case partially bad). So essentially, the correction (a "qualification defect") only involves the elective portion of the plan. Hope this helps.

VCP, but be sure the attorney that prepare the application is knowlegeable of SEP and IRA law. Also, alternating and sometime even conflicting correction procedures, may require that a choice of correction methods be first compared and then analyzed. One of the choices may allow the excesses resulting from the failed contributions to remain in the the plan, but there may be a 10 percent charge for it. In most cases, that charge can be circumvented. There is also a cummulative 10 percent penalty for nondeductible contributions to be reckoned with. AT the moment, the employees are subject to a 6 percent cummulative excise tax, but that can be waived under VCP. I have worked within a few attorneys in that area (if you need a referral).

Unless a short DB plan year is established (1/1/04-3/31/04), the simple-IRA that started on 1/1/03 would be invalidated. If the SIMPLE-IRA is invalidated, there may be state law issues--a promise was made. Any SIMPLE-IRA excess would be reported on Form W-2 in box 1 (but unlike a SARSEP, the excess is not to be reported in box 12).

Don R. Levy, is looking for an individual or firm to write a chapter on Code Section 529 plans (about 20 pages). If interested, please contact Don directly at (914) 723-7552 or e-mail Don at DONRLEVY@aol.com.

My inclintion would be to speak with the SIMPLE-IRA trustee and see how they would like the correction made. Hopefully, the client also has an IRA with that institution. I would think that it is the employer/plan that has a problem (although it may have been caused by the participant's misdirection). The amount rolled over to the SIMPLE-IRA from a nonSIMPLE IRA is an excess contribution. It would be better to have this fixed administratively, if possible.

The DFI may be changed provided such change is in accordance with the Notice distributed before the plan year began. See IRS Notice 98-4, Q&A J-1 (1998-2 IRB 26).