Gary Lesser

If the envelope were postmarked in 2004 there would be no problem. Here, knowing that the contributions are being made for 2004 when the amounts would have otherwise been paid in cash, I see no problem with accepting the check dated 12/31. By "depositing" before 2003, the employer may have had a deduction issue to resolve. As a 2004 deposit (as it will be treated having been received in 2004), all will be well (as the contribution could relate to the current or prior year). IMO, the contribution would not have to be forwarded any sooner than the date the checks would have been distributed to employees (even if the check was prepared sooner). See, too, Appleby's response. Good due-diligence. Sorry for the late reply! Hope this helps next year. Whether a check can be held as agent, or under state, NASD, or securities law rules is another matter.

There are actually two rules involved. One involves the concept of a profit-sharing plan, see Treasury Regulations Section 1.401-1(a)(4)(b)(2), which reads as follows: If more than two years old, a business necessity to justify termination of a QP in favor of a more simplier to administer plan like a SIMPLE IRA can be found. The burdens of ERISA, administrative costs and burdens, complex and ever-changing rules, and so on...... If you are 'speaking' about converting to a 401(k) Simple, the P/S plan can be amended or restated in it's entirety to a 401(k) Simple without termination of the P/S plan. To

As you thought, there are two seperate documents that are needed to establish a SIMPLE plan. The employer must establish a SIMPLE plan document and employees making or receiving contributions must establish a SIMPLE IRA arrangement (account or annuity). Documents and arrangements may be model, prototype, or individually designed (of which there are none). Hope this helps.

It is my conclusion that ALL traditional IRAs (including SEP IRAs) and ALL SIMPLE IRAs would have to be fully distributed under Treasury Regulations Section 1.212-1 to claim an investment loss in a non-Roth IRA. Roth IRAs have separate basis recovery rules, but the method of computing a loss is the same. Thus, Form 8606 is correct AND the Publication 590 (for 2003, page 38) regarding loss recognition is poorly worded, especially in light of the definition of a traditional IRA on page 7 which states that a "traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA." Thus, true statements can lead to absurd results.

If a SEP, apply the eligibility rules taking into account any service during the preceeding 5 plan years. In most cases, a former participant is a participant for the plan year of their rehire.

And the plans for this sole-proprietorship (?) may be top-heavy, too. All eligible employees must be considered; considering employees of all "related" entities. More facts would be helpful.

Mike, Nice examples. May I use them in some of my 2004 books? If so, please send me souce cite info with e-mail and/or URL. I can use the B/L message address too.

I've never seem a prototype document that actually requires the use of the sponsor's IRA (although having at least one IRA with the sponsor assures that amendments and notices will be sent; and that the plans adoption as a SEP-IRA is complete). They can also be used with model IRAs. Most prototype documents suggest that the sponsor's (or some other IRA) may/can be used in connection with its establishment. Small burden to pay for simplicity.

Seems as though you are both correct regarding the operation of Form 8606. The form seems to be contrary to the its instructions regarding losses in a traditional IRA and losses in a SIMPLE IRA. The issue now is why? And whether the Simple would also have to be fully distributed to claim a loss in a traditional IRA? If so, why then isn't a Roth treated in the same manner? Something appears to be wrong (and it may be in the form). Why should the balance in a non-traditional IRA affect the gain/loss in traditional IRA(s) under Treas Reg 1.212? What now is the basis in the SIMPLE IRA? All thoughts appreciated.

Assuming the plan was not an ERISA plan, arguably Code Section 4975©(1) regarding prohibited transactions would apply if the contributions were not made within the 30 day period following the month in which the amounts would have been paid in cash--no exceptions. [iRC 408(p)(5)(A)(i)] Amounts contributed after that date would not be treated as SIMPLE IRA contributions AND arguably not deductible. [iRC 408(p)(2)(A)]

Even assuming all traditional IRAs and all SIMPLE-IRAs were distributed, I see nothing that would allow them to be aggregated for basis determination. I also, see no reason why you would want to aggregate them. Perhaps a simple (theoretical) fact pattern would help me to understand what it is you are driving at. Assume nondeductible traditional IRA contributions of $20 with a distribution of $5 from all traditional IRAs. The loss is $15 (subject to the 2% of AGI limit). Now add a SIMPLE with no basis. How would that change anything (excess SIMPLE IRA contributions aside)? If aggregated, wouldn't any gain in the SIMPLE reduce the loss?

Also note that service during the short plan year counts as a service year for purposes of the 3 out of the last 5 year participation rule. Such an employee must also receive a contribution for the short plan year if he or she would have been entitled to a contribution for the year in which the short plan year begins if there had be no change. Note: If the plan year was not the same as the employer's taxable year, the deduction limit would be based on compensation for the CY ending within the employer's taxable year. [iRC 404(a)(3)]

Agreed. A SEP is established by an employer. Although a sole-proprietorship may establish a SEP, a partner is not a sole-proprietor(ship). It is the employer (partnership) that must adopt the SEP plan. If the contribution is made at the highest level, then those not wanting that much cd withdraw the amounts from the IRA (without penalty if age 59-1/2). Because the employer's contribution is not subject to self-employment taxes, there may be some tax savings. If the SEP is established by a partner (absent Schedule C or Schedule F income), their SEP compensation is zero. Controlled group and IRC 415(h) issues might also apply.

Not in this life. File amended returns for all open years. If all traditional IRAs are distributed, and the basis hasn't been recovered, then a loss may be claimed (subject to the 2% of AGI limit). Failure to deduct the allowable contribution does not creat basis.

Rule similar to above. If owner has more than 50% control of both entities, the limit is aggregated. [iRC 415(h)]

Yes. The PS deduction limit is also reduced by any SEP contributions.

From 1.401(a)-4, Q&A 2(b)(3) provides: Because a SEP is not subject to 401(a)(4), I do not believe it can be considered for aggregate testing purposes. Sammy, you mention (in your cross post)-- Perhaps you can contact the author to see the above is still his/her current opinion?

From 1.401(a)-4, Q&A 2(b)(3) provides: Because a SEP is not subject to 401(a)(4), I do not believe that it can be considered for aggregate testing purposes.

No, a SIMPLE IRA is not a traditional IRA (even after 2 years have expired). See Pub 560, page 10, "Kinds of traditional IRAs."

With multiple entry periods provided in the plan, there is no problem with allowing employees to make or change an election for the following month.

It would appear that self-correction (if it applied) may have to be made over a two year period to satisfy the trustee/custodian. The letter should state that the contributions are being made pursuant to Rev Proc 2003-44 etc. But see below. Considering the amount invloved, however, "Self-Correction" (Section 8.01) may not be available as the error may be more than "insignificant." SCP has no reliance and the amount of penalties could be significant (cummulative 6 percent penalties for employees and 10 percent for the employer). Gut feeling , I'd ask for service approval (VCP). As long as we have "user fees," don't expect answers (just problems) from the IRS.

Once the 25 percent exclusion allowance is determined (based on includible compensation) the catch up amount may be contributed in addition to the 25 percent exclusion allowance. [iRC 414(v)] E.g. Frank earns $60,000. From that amount he defers $14,000. The 25 percent exclusion limit is based on $48,000 ($60,000 - $12,000) and equals $12,000 (plus catch up contributions). See "Section 402(g) Limit" on page 3 of Form 5305A-SEP. Assuming no employer contributions are made Frank may defer the entire $14,000. Assuming Franks compensation were higher. He may not contribute elective amounts beyond his ADP limit (assumed to be okay here-he's a N-Key employee) plus the catch-up amount. Once the ADP limit is reached (or employer contributions cause elective amounts to be reduced), then elective amounts above that amount (up to $2,000 for 2003) may be treated as catch-up contributions. Here, the only way for a non-key employee to have an catch-up contribution would to be to defer (make an elective contributuion) of more than $12,000. An employee can not bring there account up to the $40,000/$42,000 limit by making additional contributiions beyond normal allowable elective plus catch-up. Note: although the 100 pecent limnit can also be exceeded by catch-up contributions, the exclusion limit is always lower. The language in the prototype regarding the term "compensation" is less than clear because it tries to prevent allocations (although deductible) from exceeding the IRC 402(h) exclusion limit. Publication 560 states that allocation compensation is not reduced by elective contributions, but that an employer can choose to exclude elective amounts from the definition of comnpensation. Clearly, the IRS did not write this to for the handfull of individuallly designed SEPs (that might exist). It must be assumed that it applies to IRS model and prototype plans. Nonetheless, the 25 percent exclusion limit is based on the includible compensation.

In most cases, the client could adopt a prototype or individually designed SEP/SARSEP that wd allow for its continuance along with a qualified plan for 2003. For grandfathering purposes, IMO, do not formally terminate the SEP/SARSEP. Just let it remain "temporarily discontinued" (read: dormant; but do provide the annual contribution notice and any notices regarding amendments and the discontinuance of contributions). Perhaps the SEP could be used to hold top-heavy contributions?

Arguably, the same tax results apply to distributions from a Simple-IRA as apply to distributions from a traditional IRA; that is, they are generally taxable except to the extent of any pro-rata basis. Such would occur for example when an excess contribution is made and the excess is reported on Form W-2 (or picked up in income and not deducted). See General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12--96), page 141 (the 1996 Blue Book). Special rules apply during the first two years. It should be noted that the 6 percent tax does not seem to apply to SIMPLE-IRAs. Excess amounts removed after the due date may, however, be subject to double taxation since 408(d)(5) does not increase the amount allowed to be withdrawn as it does for a SEP. The simple-ira excess rules are not explained very well in official guidance. See, too, Notice 98-4, Q&A I-2.

If a person participated in a 403(b) plan and a qualified plan, then combine contributions made to the 403(b) account with contributions to the qualified contribution plan and simplified employee pensions of all corporations, partnerships, and sole proprietorships in which the individual has more than 50% control. The elective limit is a plan limit as well as an individual limit.