Gary Lesser

1) Do we have to file with the EBSA to get a 'no action letter'? Yes. See VFCP program at 67 Fed Reg 15051-15060 and PTE 2002-51 (67 Fed Reg 227, 70623-70628) 2) Do we have to make up lost earnings for one of the owners accounts, or can we just contribute their withholdings and 3% employer match? Yes, the restortation must be complete. 3) You had mentioned a 10% penalty. Is that applicable to this situation? Not if there are no excesses or if W-2 used to correct any excesses. 4) This situation won't disqualify the plan, will it? Probably not (if corrected). If the EBSA accepts the late contribution, the IRS is likely to follow. There is no guidance on the plan qualification issue (if it is an issue), other than to say it is probably correctable under EPCRS procedures.

DOL issues aside (for the moment), the failure to deposit the funds within 30 days as required by IRC section 408(p)(5)(A)(i) suggests that there is, already, no valid SIMPE IRA. It's an administrative requirement. [see IRC 408(p)(1)(A)] The DOL/EBSA has a VOLUNTARY FIDUCIARY CORRECTION PROGRAM. In general, the EBSA will issue to the applicant a no action letter with respect to a breach identified in the application of an eligible person or entity and the breach is corrected. Pursuant to the no action letter it issues, the EBSA will not initiate a civil investigation under Title I of ERISA regarding the applicant's responsibility for any transaction described in the no action letter, or assess a civil penalty under ERISA Section 502(l) on the correction amount paid to the plan or its participants. The failure to timely transmit participant contributions is an eligible transaction. The emloyer must pay the expenses associated with the correction process, such as appraisal costs or the cost of recalculating participant account balances. It must also restore to the plan the principal amount involved, plus the lost earnings. Back to the plan (if it even exists, see above), the failure to make the matching contribution (a separate and distinct issue) will invalidate the plan for the year. State law issues may also apply because of the employer's promise to deferrals match for the year. Hope this helps. That being said, if no contributions were made to plan (and I think they have been made), I wouldn't be surprised if the fix you mentioned (repay as wages) is adopted by the employer. If any contributions were made, then a cummulative 10 percent penalty may apply until nondeductible contribution corrected (which may presuppose that the DOL issue is addressed and the contributions and earnings deposited). CAUTION: There are also more severe (some criminal) penalties possible under ERISA. More facts, especially details, would be more helpfull, but I think that the employer should consult with a competant ERISA/Tax Attorney. Plan and owners clearly have IRS problems and very likely problems under ERISA as well. Making the 3 percent contribution is probably the least expensive fix (and the DOL late deferral issue fixed). But again, read first line of this reply. A PLR may be needed to address the 30-day deposit administrative requirement rule. The IRS's EPCRS procedure may also be used to treat nonegregious failures and certain qualification failures.

Neither of the SEPs qualify as a plan for the partnership because the partnership has adopted no plan. If the individuals are also sole proprietors, they may each have a SEP that covers their earned income from their sole-proprietorship. The partnership income may not be considered unless they are part a controlled/related/affilliated group. If so, then none of the plans are valid since they were not adopted by the partnership. The unequal contributions are also a problem but only apply to a plan; a plan that doesn't seem to exist. I bet there are some nonowner employees too, somewhere(?). Hope this helps.

Deductible contributions to SEP reduce the general profit sharing limit by the amount deductible under the SEP. SEP-IRA assets may only be transferrd to a traditional IRA or qualified plan (or 457 trust) that allows. The plan document generally determines when such amounts can be distributed from plan. As a traditional IRA, the account can be accessed 24/7. If the SEP turns out to be discriminatory upon termination (e.g., contributions made for some, but not all eligible employees for year), then there are more issues that will have to be dealt with (which wd include revised W-2s) and possible deemed excess or nondeductible contributions to IRAs by participants. Perhaps someone else can indicate if there are any "safe harbor" issues (not by area).

Request to speak with firm's compliance or operations department (best if in writing, fax is fastest); also cc: "Compliance Department." Show them Code Section IRC 404(h)--see below. Explain that if the contributions are not accepted and the employer unable to treat the plan as a SIMPLE-IRA it will hold the firm (and the trustee) liable for all damages (including loss of the tax-deferred investment opportunity), all legal and accounting fees, of the employer and affected participants, including any fees under the EPCRS or DOL Fiduciary correction program. It is not their business to inquire on this matter. Does your trustee require a breakdown of the type of contribution (elective, nonelective, matching)? Hope this helps. 404(h) Special rules for simplified employee pensions(1) In general--Employer contributions to a simplified employee pension shall be treated as if they are made to a plan subject to the requirements of this section. Employer contributions to a simplified employee pension are subject to the following limitations:(A) Contributions made for a year are deductible--(i) in the case of a simplified employee pension maintained on a calendar year basis, for the taxable year with or within which the calendar year ends, or(ii) in the case of a simplified employee pension which is maintained on the basis of the taxable year of the employer, for such taxable year.(B) Contributions shall be treated for purposes of this subsection as if they were made for a taxable year if such contributions are made on account of such taxable year and are made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).(C) The amount deductible in a taxable year for a simplified employee pension shall not exceed 25 percent of the compensation paid to the employees during the calendar year ending with or within the taxable year (or during the taxable year in the case of a taxable year described in subparagraph (A)(ii)). The excess of the amount contributed over the amount deductible for a taxable year shall be deductible in the succeeding taxable years in order of time, subject to the 25 percent limit of the preceding sentence.(2) Effect on certain trusts--For any taxable year for which the employer has a deduction under paragraph (1), the otherwise applicable limitations in subsection (a)(3)(A) shall be reduced by the amount of the allowable deductions under paragraph (1) with respect to participants in the trust subject to subsection (a)(3)(A).(3) Coordination with subsection (a)(7)--For purposes of subsection (a)(7), a simplified employee pension shall be treated as if it were a separate stock bonus or profit-sharing trust.

For deduction purposes, the contribution has to be made by the due date. If the plan is subject to ERISA, then the timing rules certainly apply for DOL purposes. HOWEVER, in the case of a SIMPLE-IRA, a 30-day rule-- is an "administrative requirment"--as specified in Code Section 408(p)(5)(A)(i). It states that the elective contributions are to be made within the 30 day period "following the month with respect to which the contributions are being made." Earned income (whenever computed) is treated as earned on the last day of the year (generally December 31st). I am not entirely confortable with relying on the Preamble in the case of a partner in a SIMPLE IRA--January 31 may be the deadline (but not necessarily a DOL safe harbor if ERISA applies to the plan). If the administrative requirments are not satisfied, the plan is not a SIMPLE-IRA for the year. [iRC Sec. 408(p)((1)(A)] This is an issue the IRS needs to address; but is unlikely to do so. Note: I would be even less confortable applying the DOL rules to a sole-proprietor; as they were based on the partnership regulations that are outside of the jusisdiction of the EP/EO division. Hope this helps. Nice find on the Preamble, Belgarath.

Because no one has added their opinion, I've decided to agree with myself.

You are correct (to avoid many problems and issues).

The deductible SEP contributions will reduce the 401(k) deduction limit by the same amount if the employers are related/controlled/affilliated. Otherwise, the full contribution of $41,000 could be made into each plan (plus catch-up contributions in the 401(k) if eligible. HOWEVER-- The business must establish the SEP and cover all eligible employees; none may opt out. Only the W-2 income of a Sub-S shareholder can be used as plan compensation. The dividend income is probably miscatagorized (if as result of services to corp) and may be subject to FICA and FUTA (i.e., not SECA).

Could be unless all commissions/payouts are rebated to plan. See examples in Treasury Regulations Sec. 54.4975-6 regarding statutory exemptions.

No. See IRC 415(k)(1)--SIMPLE IRA not listed.

Kime, Could you explain your facts more clearly. Why isn't the owner an employee any longer? What is the excess, how created? More facts would help. In general, a SIMPLE IRA excess should be included in boxes 1 (and possibly boxes 3 and 5) of Form W-2. The amount reported in box 1 should not also be reported in box 12. The employer may be subject to a 10% tax unless corrected (reflected on W-2). Employee treated as making a prohibited contribution to SIMPLE IRA (an excess). IMO, not subject to 6% penalty, but taxed twice if not corrected. Correction may have to be completed by due date if amount contributed exceeds IRA limit for year to avoid double taxation. See IRC 408(d)(4) and the correction limit amount which is set forth in IRC 408(d)(5). Hope this helps.

The dividend income can not treated as plan compensation. See Durando v. US 70 F3d 589 (9th Cir 1995). In most likelyhood, the dividend income does not represent economic reality and the individual be treated as employess receiving wages for services essential to the operation of the business. Thus, the "dividend" income may be subject to FICA and FUTA. See Grey's Public Accountant c Comm (119 TC No. 5) and Veterinary Surgical Associates, PC v Comm (117 TC No. 14, Oct. 15, 2001); see, too, Yeagle Dywall, TC Memo 2001-284. That being said, if invested corporate capital--as opposed to services--generated some gain, then dividend treatment might be an appropriate pass through to some extent. If you have access to the SIMPLE, SEP, and SARSEP Answer Book, see Q 6:4.

Converting a SIMPLE 401(k) to a non-SIMPLE 401(k) mid year would probably cause there to be bad allocations (remember the notice given employees) for the plan year. If it is already done, it can be corrected under the EPCRS? Once the plan is amended the 401(k) SIMPLE became bad for the year. Thus, excesses wd be created. In the absence of well-established guidance, the position of the IRS regarding excess contributions to a SIMPLE 401(k) plan is, at best, unclear. Several possibilities exist, some of which offer solutions: 1. The plan becomes a traditional 401(k) plan and is taken out of the realm of a 401(k) SIMPLE plan. In the authors’ opinion, this is an unlikely choice because of the information provided to the participant by the plan regarding the manner in which the plan would operate for that plan year. 2. The plan becomes a “bad” SIMPLE plan or a plan with a “bad” contribution allocation. Correction should be made under the EPCRS (see Q 15:63). 3. It may be possible to correct the excess contribution if plan contributions are the result of a mistake of fact. [ERISA §403©(2)(A)] In the authors’ opinion, this option is least likely; furthermore, the IRS has not included excess SIMPLE contributions among clear mistakes of fact. 4. It may be possible to correct the excess contribution (in accordance with plan provisions) if plan contributions are conditioned on their deductibility and the deduction for the contributions is subsequently denied. [ERISA §403©(2)©, IRC §4972©(2)] 5. In May 1999 the IRS informally agreed with propositions 2 and 4 above (see, too, Q 2:90). [General Information Letter issued to Gary S. Lesser, May 18, 1999; see also Rev Rul 91-4, 1991-1 CB 57.]

Blinky, Very well said. Sal's Outline Book is clear, concise and well written. His information is always timely. Perhaps you should discuss your desire for an income stream with Sal and he can teach you how to write in your spare time!

Can contributions under a prototype SEP be considered in the testing of a 412(i) plan for 410(b)/401(a)(4) DC/DB aggregation when carving out employees using the 7.5% gateway? If so, must the DC(SEP) be adopted by 12.31.03 to be considered with a 2003 412(i) plan, or can it be installed by tax filing due date? My gut says "no," but does anybody have any cites, logic, or reasoning, one way or another? THX.

Can contributions under a prototype SEP be considered in the testing of a 412(i) plan for 410(b)/401(a)(4) DC/DB aggregation when carving out employees using the 7.5% gateway? If so, must the DC(SEP) be adopted by 12.31.03 to be considered with a 2003 412(i) plan, or can it be installed by tax filing due date? My gut says "no," but does anybody have any cites, logic, or reasoning, one way or another? THX.

Prof, Thank you for your inquiry. Having dual eligibility is likely to result in prohibited discrimination in favor of the group in which discrimination is prohibited. If prohibited group members could have satisfied the plan's "new" eligibility requirement at the time the plan was originally instituted, the plan could be amended to provide for a longer (new) service requirement. This is a borrowed rule from the qualified plan area. See Revenue Rulings 70-75, 70-77, and especially 73-382. Although, the example (Q 2:53 in 9th ed.) is correct, I will word it differently in the next edition to clarify the rule and the point you make. Perhaps add a Joe-type example.... Joe starts a SEP for his business, MoJoe Inc.. He uses 1 yr eligibility and, but has performed service for the MoJoe during the prior 3 years. Joe cd amend the plan and provide for a 3-year service requirement. Because he would have participated had the plan originally contained a 3-year service requirement, prohibited discrimination would not occur. An individually designed plan could have been used with dual eligibility (or a model/prototype used, and amended for year 2). If Joe only had 1 year of prior service, the i.d. plan (or amended model/prototype) would likely be discriminatory under Code Section 408(k)(3). Hope this helps. Any other suggestions are welcome. Thanks again.

Very well said QDROphile; but shdn't they all join in the adoption of the plan, preferably a single document? While multiple documents would work for a SEP, different provisions could cause nightmares.

Yes, provided the 401(k) is not a 401(k) SIMPLE 401. The SIMPLE IRA can be rolled over only after the two-year holding period rule is satisfied. Current years SARSEP contributions can not be rolled over until March 15 of the following year or employer provides notice that ADP test satisfied, if sooner. The qualified plan must specifically accept r/o from plan types desired.

Treat the amount above 10 percent (as computed below) as "wages" on Form W-2 for 2003. The amounts are now treated as IRA contribution by employee to traditional IRA (trustee will recode if requested). Individual's must remove any excess (over traditional IRA limits 100%/$3,000/$3,500) by Federal tax return due date (with gain) to avoid penalties on exess contribution. Gain may be subject to penalty if under age 59-1/2 unless another exception applies. See, Prop Treas Reg Section 1.408-7(e) and example in (f). Under the proposed regulations the amount contributed not in accordance with the formula is treated as not contributed under the SEP. [The example omits details for the second employee "B"; they are: $11,500, $10,000, $1,500, and 15%.] Calculation: .10 X ((Pre-plan compensation + allocation) / 1.10) = deemed contribution (the excess amout treated as wages, subj to FICA and FUTA). In essence, the excess amount is added to pre-plan compensation, then allocated, here 10 percent. So, employees that should have gotten 10 percent originally will wind up with slightly more than 10 percent (of their original compensation) in the end. Although not required, a notice to employees would be helpfull in removing the excess properly and explain why their W-2 is higher, and that they have "made" deemed traditional IRA contributions because of the error. Hope this helps.

Generally, the entity for which the services are performed (the employer) should establish the plan. All employees of all entities that are controlled, related, or affilliated must be treated as if employed by a single employer. Does the LLC have any employees or is everything contracted out to the S-Corps. Perhaps the LLC needs the plan if it pays compensation. Perhaps S-Corp(s) need a plan if they pay compensation. Perhaps all entities need to adopt the plan. Who's the employer? Seems like the LLC needs the plan here. Amounts paid to the S-Corps are probably a scheme/shame and may not amount to compensation under either plan! Hope this helps.

Yes, but keep in mind that the qualification of the plan may depend on the true nature of the relationship as employer/employee. If the W-2 compensation is reasonable, there should be no problem. Banks, but not all financial institutions will permit the establishment of an account for a minor because of "recission" issues (which don't generally occur in FDIC insured accounts, and so on).

Assuming the individual is an employee and earns above the minimum compensation amount (generally $450) if required under the plan, the contribution would be based on compensation paid by the employer. The disability payments of an insurer would not be treated as plan compensation.

Ths can be done. The contributions to the SARSEP reduce the P/S deduction limits. The top-heavy rules have to be satisfied if either plan is top-heavy. Aggregate 402(g) limits apply for the year. Hope this helps.