Gary Lesser

NO. CLIENT NEEDS A NEW ACCOUNTANT. A SARSEP that is top-heavy must satisfy the top-heavy rules. A 3 percent nonelective contribution to all eligible employees would satisfy that rule. It would not eliminate the 125 percent ADP test or the 50 percent participation rate requirement. The top-heavy contribution is not taken into account when doing the ADP test. SEPs are very unforgiving and the client may owe a bunch of cummulative 6 percent taxes. The common denominator seems to be zero, thus all contributions are excesses. If all eligible employees received 3 percent, then the SEP side is good to that extent (only). Matters pertaining to SEPs can be found in the SIMPLE, SEP, and SARSEP Answer Book. CLICK: SIMPLE, SEP, and SARSEP Answer Book

Agreed. It should also be noted that unlike the normal elective contribution, the catch-up amount does not reduce the compensation upon which the 25% exclusion limit is computed. It would appear that the $14,000 is deductible, excludable, and does not violate 415. Compensation differs depending upon the limitation being applied. Regarding the sections you mentioned, in general: 402(h) -- the 25 percent exclusion limit (one of two limits under this section) is based on compensation (within the meaning of section 414(s)) but excludes normal elective contributions only (see section 414v) . [$12,000] The sum of nonelective and normal elective contributions are subject to this limit. [$53,000] The catch-up amount [$2,000] is separately excludible. [(.25 x $53,000) plus $2,000]. The $40,000 limit under THIS section is reduced if the plan is integrated (model plan's are not integrated). When an employer makes nonelective contributions that would cause this limit to be exceeded, elective contributions are reduced as necessary (and the ADP test may have to be rerun). Note: This limit is not contained in the plan (it is not a required plan provision). Compensation, as defined in the plan, has nothing to do with this limit. It a limit that applies to each participant. Designing a plan around this limit is often most productive (since it is equal to or less than the deduction limit). The allocation limit in the model SARSEP plan, prevents this limit from being exceeded. Note: Compensation for allocation purposes, generally include elective contributions. An employer may elect to exclude elective amounts for this purpose. See IRS Pub 560, Section 1, definition of compensation. Note: Compensation for ADP testing, however, includes elective deferrals. If self-employed earning $65,000 (after reduction for 1/2 SE tax deduction and nonowner contributions), then this limit would be based on $53,000 (further reduced by any employer nonelective contributions). The catch-up amount [$2,000] is separately excludible. 404(h) & (n) -- The 25 percent deduction limit (which may be higher than the amount that can be excluded from a participant's gross income under section 402(h)) is based on $65,000. The normal elective and catch up elective contributions are separately deductible. [(.25 x $65,000) plus $14,000] If self-employed earning $65,000 (after reduction for 1/2 SE tax deduction and nonowner contributions), then this limit would be based on $65,000 (further reduced by any employer nonelective contributions). 415 -- The $40,000/$42,000 limit applies. The 100 percent limit is based on $65,000. Both limits apply to a SEP/SARSEP. If self-employed earning $65,000 (after reduction for 1/2 SE tax deduction and nonowner contributions), then this limit would be based on $65,000 (reduced by any employer nonelective contributions). 414 -- This section (controlled, related, and affiliated employers, and other definitions) generally applies to a SEP/SARSEP which is a defined contribution plan.

It is possible that the $40,000 limit under Code Section 415 will be reached because of the application of the annual compensation limit and the 25 percent limit on allocations. Code Section 402(h)(2)(B) states that the maximum dollar amount that can be allocated each year to an HCE’s SEP IRA ($40,000 for 2003) is “reduced . . . by the amount taken into account with respect to such employee under section 408(k)(3)(D).” Code Section 408(k)(3)(D) does not provide a concrete amount, but instead refers to “the rules of 401(l)(2),” which are the integration rules. For the reasons that follow, it appears that the language of Code Section 402(h)(2)(B) means that the $40,000 amount is reduced by the product of the disparity rate (generally 5.7%, 5.4%, or 4.3%) and the compensation of the HCE up to the plan’s integration level. Under the law applicable to taxable years beginning before 1983, Code Section 219(b)(7) provided that the dollar limit (then $7,500) was to be reduced by “the amount of tax taken into account with respect to such employee under . . . 408(k)(3).” Also under prior law, FICA (Social Security) taxes were treated as employer contributions for purposes of complying with the SEP requirement in Code Section 408(k)(3) that contributions be a uniform percentage of compensation. Senate Report No. 1263 [95th Cong, 2d Sess 93 (1978)] suggested that integration could be accomplished as follows: the employer’s contribution will be an amount equal to x percent of compensation, up to a maximum of the lesser of $7,500 or 15 percent of compensation offset by the employer’s share of Social Security taxes paid on behalf of the employee. [see pre-ERISA Treas Reg § 1.401-12(h)(3)(i), 1.401-12(h)(3)(ii).] According to the way SEP integration used to work, it appears that the language in Code Section 402(h)(2)(B) means that the $40,000 amount is reduced by the disparity rate multiplied by the compensation of the HCE (not in excess of the plan’s integration level). The disparity rate is the excess contribution percentage reduced by the base contribution percentage. Informally, the IRS has indicated that the Section 402(h) reduction does apply. Representatives of the American Society of Pension Actuaries (ASPA) met with James E. Holland, Jr., Chief, Actuarial Branch 1, and Richard Wickersham, Chief, Projects Branch 2, of the IRS, on September 25, 2001, in Arlington, Virginia. The meeting served as the basis for discussions at ASPA’s 2001 National Conference, IRS Q&A, No. 65(v). The statements of these IRS representatives do not represent official positions of the IRS; nor were they reviewed or approved by the IRS or the Treasury Department. See, too, page 6 of IRS prepared chart (attached) or click link to IRS.gov. http://www.irs.gov/pub/irs-tege/cd_comp_chart.pdf When the intent is to place a $40,000 limit on total retirement contributions, the foregoing interpretation seems to make sense as a policy matter—it puts the amount deemed to be contributed by the employer under Social Security into the same category as the SEP contributions. Notwithstanding that the IRS has approved SEP arrangements that provide for a nondiscriminatory contribution of a flat dollar amount per hour for each participant [Ltr Ruls 8824019, 8441067], the interpretation presented above is also in keeping with the structure of Code Section 408(k)(3), which, while calling for a uniform percentage to be contributed under the SEP arrangement, in effect allows the employer to consider FICA contributions to be SEP contributions. For 2003, the maximum offset produces an exclusion limit of $35,041 ($40,000 - ($87,000 x 5.7%)) ($37,041 with catch-up). Prior years' limit of 15 percent and a lower compensation limit made this a moot issue for the last several years. [iRC Sec 402(h)(2)(B)] If the plan were integrated at $1, the 2003 maximum elcludable contribution for an HCE is $39,999.94 (plus catch-up contributions). CHARTIRS.pdf

NOTICE Version 2003.5 of QP-SEP Illustrator software was mailed to all registered users on 11/14/03. Speed issues regarding the solve-for and optimize funtions have been significantly improved. The optimize function can now find the most effective integration level to the nearest doller. A new Tutorial is included. File extraction to a 123 compatable file is now available. For more information on QP-SEP Illustrator see: QP-SEP Illustrator Information

Contributions for the 2003 Simple IRA plan are deducted on the 9/30/04 return. The Simple must be maintained on a calendar-year basis. So, deferrals made in January 2004, will be deducted on the 9/30/05 return. The matching contribution limit of 3 percent of compensation is based on compensation for the entire calendar year.

1. Too bad the owner chose not to participate or make a nonelective contribution for year. Because elective contributions were not made by the owner, the owner did not participate. Thus, aside from a bad plan year (if you really meant a fiscal plan year), the only issue is the excess matching contribution made to one account (that the owner controls). The match is only allowable to the extent of the elective; in this case, nothing--so the match is an excess. Do not deduct the excess on the business tax return for the FY ending 9/30/04 (see below). Report excess in box 1 of owner's W-2. On employer letterhead prepare notification to employee to assist in getting the money out of the Simple-IRA without the 25 percent penalty, if applicable. Owner should request that excess amount (including gain) be distributed (to correct; otherwise excess amount taxed twice). IMO, the 6 percent penalty would not apply if left in the SIMPLE IRA. OTOH, if the plan is a CY plan, then it may be possible for the 2003 elective contribution to be made timely. In such case, the excess is only $1,713 (see above) 2. The SIMPLE IRA plan year is required to be the calendar year under 408(p)(6)©. If 9/30 was used as the end of the plan year, then there may be several other problems. In that case, see the Voluntary Correction Programs available under Revenue Procedure 2003-44. Allowable contributions made for the 2003 SIMPLE CY are deductible on the business's tax return that includes 12/31/03, to wit, the 9/30/04 return. [iRC 404(m)]

Good read. For more information Click below link: Additional Information

It is possible that ERISA Section 514© prempts the state's law. And ERISA Section 206(d) would then prohibit the escheat. Some state have case law, other's don't. But the Advisory Opinion can't be ignored if the SEP-IRA is an ERISA covered plan. I'm only the messenger. The Advisory Opinion is reproduced below. An IRA is subject to the PT rules under the Code. I think that an ERISA covered SEP (which would include the IRAs) are also subject to the PT rules under ERISA (see ERISA Section 404, and the DOL has granted exemptions therefrom). ERISA Section 403(b)(3) only exempt certain IRAs from having to establish a formal trust. Did you mean to cite something else?

I agree. Note, however, that the U.S. Department of Labor believes that ERISA preempts state escheat laws as applied to ERISA-covered plans (Advisory Opinion 94-41A). If the IRA is connected with an ERISA covered SEP, then arguably no esheat is permitted. In addition, the IRS has a letter forwarding program, see Revenue Procedure 94-22 Rev. Proc. 94-22

The W-2 income is not offest by a schedule C loss. Unfortunately, ALL eligible employees must recieve a contribution. Since the lowest common demoninator is "0" (because an eligible employee wasn't covered) none of the contributions for any of the employees are any good. All contributions are excess contributions. See example in Prop Treas Reg Sec 1.408-7(f)(2). That being said, the VCP procedures contained in Rev Proc 2003-44 cd be used to fix this error. By itself, this error is not egregious. Self correction might even be possible. Because deductibility, participant exclusion, and 415 issues, the make-up contribution(s) will probably cause a few other issues to be raised. An actual application to the Service under Rev Proc 2003-44 would probably be best. Let me know if you need someone that can handle a VCP application for your client. I'd be happy to recommend someone.

You can have one, but not both, of the plans for the year. Can not mix and match during any calandar year period (exclusive plan rule). No overlapping plan years. Short QP plan years must end before the CY begins. The Simple plan provisions appear to have already been violated; the 3 percent contribution is a matching contribution. How can there have been a match when no elective contributions have been made. IMO, the plan has been funded. The Simple-IRA already contains excess contributions (i.e., contributions not received under a qualified salary reduction arrangement, see IRC 408(p)(2)). But, "yes," they can adopt a 401(k). See above posts for treatment of excess SIMPLE IRA contributions.

A nonmodel SEP plan may be adopted and used with a defined benefit plan. Code Section 404(a)(7) will apply to limit deductions to the greater of (a) 25 percent of compensation, or (b) the minimum funding standard amount. Nondeductible amounts may be carried forward (but may also be subject to a 10% penalty until corrected).

If the partnership did not adopt the SEP then there may be no plan even though both individuals established plans for their sole-proprietorships. OTOH, from Form 5305A-SEP-- Arguably, then, if the entities are "related" (see above), the plan would be valid (if it covered all eligible employees of all "related" employers) without a formal adoption by the partnership. I suspect that the 3 employers are not controlled or under common control; pray for an affilliated service group. See IRC 414(a), (b), and ©, 414(m).

The 2-year rule does not apply to a SEP/SARSEP. However, the current years elective contributions cannot be distributed (or rolled over) until the employer provides a notice to the participant that the SARSEP 125 percent ADP test was satisfied or March 15 of the following year, whicheve is sooner. [iRC 408(k)(6)(F)(ii) and Form 5305A-SEP]

Dear Cross-Poster The 1099 wd appear to be correct unless the attorney was a partner. If the attorney was a partner, his efforts are for the partnership, and the renumeration is earned income. If the employer picks up the attorney's FICA, be sure to include that amount into income on the attorneys Form W-2 (as it is additional compensation). If FICA is paid on that amount, then the calculations stops at 1 cent (and can take awhile). It does not appear that contributions have been made for ALL SEP eligible employees. If that is the case, then, the plan is bad and all SEP contributions are excesses. If that is the case. a salary reduction 401(k) plan could be implemented for 2003, but ADP testing IS required and so this plan may be moot without rank-and-file participation. Safe-Harbor designs might also be available and that wd negate the ADP testing, but require some matching contributions (to those that make contributions). In any event, the employer may have to contribute a top-heavy contribution (up tp 3% to all non-key employees). If employer profit-sharing contributions are made to the PS plan, then all eligible employees must receive allocations. If the SEP is a valid plan, then the employer is stuck with it for 2003. The 401(k) elective limits for plans starting in 2003 is $12,000, plus catch-up contributions of up to $2,000 if age 50 or older and the plan permits them to be made. Hope this helps you and answers all your questions.

Not in a SIMPLE IRA. The definition of compensation is different (based on IRC 1402(a) without regard to the SIMPLE IRA contributions). [iRC 408(p)(6)(A)] That being said, the 7.65 percent reduction (the .9235 factor) comes from Code Section 1402(a)(12). That factor may also be used in computing the "1/2 of the SE tax deduction" applicable to a qualified plan or SEP, but not a SIMPLE IRA, under Code Section 401©(2)--called the "in-lieu of" deduction. In fact, it is always used because the SE tax has not yet been computed and 1/2 of it is needed. In other words, the .9235 percent factor does the same thing as the earned income rule requiring 1/2 of the SE tax deduction to be subtracted to arrive at EI in a qualified plan or SEP, although it is directly applicable to a SIMPLE IRA. Incidently, the "in-lieu of" factor may result in less SE tax being used in the reduction because the actual SE tax could be higher if TWB earnings are exceeded because of medicare (uncapped). Hope this helps. p.s. Welcome to our board.

Note, too, that $40,000 is NOT an achievable result in an integrated SEP plan for an HCE on an excludible basis. In your example, the owner could get the $6,560.70, if all employee (including the owner) received a 5.7 percent contribution. The owner wd get $6,560.70 + $11,400; well beneath the $35,160.70 maximum exclusion limit amount for 2002. If a corporate SEP is integrated at the TWB, the $40,000 exclusion limit is reduced to $35,160.70 ($40,000 - ($84,900 - 0.057)) if the individual is a HCE. [iRC 402(h)(2)(B)] As pointed out above, the maxmum spread is 5.7% (when integrated at the TWB and if all employees get at least a 5.7% of compensation contribution). $200,000 - $84,900 = excess compensation = $115,100 $115,110 x 0.057 = $6,560.70 $35,160.70 - $6,560.70 = 0.142999980 $200,000 So, if individual's not earning in excess of the TWB receive a contribution of 14.3 percent, the owner could receive $35,160.70. If there were 2 employees earning $45,000 each (my assuption), this plan would cost $48,030.69. If the plan were integrated at $69,601 (80% TWB + $1) instead, the employees would receive 14.6 percent, but the owner would receive more, $36,241.55 (the effect of a lower spread on the lower integration level). Although the cost of this plan is $49,381.55, the owner would recieve $1,080 of the additional $1,351 cost (80% effective). If self-employed, other factors would have to be considered.

More information or clarification is needed. Is company D part of the controlled group? Do A, B, and C each have separate Simple IRAs or one Simple IRA adopted by all three entities? What was the relationship of A, B, C, and D before 2003? Does any individual (directly or indirectly) own more than 50 percent of any of the entities? What type of controlled group is this (Brother-Sister, Parent Sub?) and explain how they became controlled? The following, from IRC 408(p)(10), may be helpfull.

Nice reply. It should be noted, however, that a plan subjct to ERISA must forward elective contributions as soon as they can reasonably be segregated from the employer's general assetst, but not later than the previously mentioned 30-day period required under the Code. [iRC Sec 408(p)(5)(A)(i); ERISA Sec 2510.3-102]

Two LLC's are owned as follows by W, X, Y, and Z (all unrelated adults). Are they a brother-sister controlled group? Since Y and Z have no interest in LLC-B, it wd appear that the more than 50% rule is not met and they are not controlled under Section 1563. Does anyone agree or disagree? Individuals.....................LLC-A.................LLC-B W .......................................25%.................. 50% X .......................................25%.................. 50% Y .......................................25% Z .......................................25%

It is not clear whether the excess can be disregarded for purposes of the $12,000 limit. I think they can be disregarded if "corrected." Whether an actual distribution is made or can be effectuated by an employer may be problematical. It is unclear whether inclusion on Form W-2 is tantamount to a distribution (I think it would be; because the employer does not have any control over the funds in the account). The IRS seems a bit clueless on how IRA-based plans actually work; they assume (and have for some time) that the employer actually can implement or effectuate a distribution. Notice, too, that the IRS has never issued any guidance regarding distribution of excess SIMPLE-IRA contributions. Whether they are disregarded for ADP testing, see below. Aside: in a recent EPSRS submission, the IRS waived the 10 percent penalty for assets retained in a SIMPLE (not distributed) upon a qualification failure (employer had 2 plans). The practitioner's argument was that the employer had no control, rights, and so on. It seemed to work. Treasury Regulation 1.408(g)-1(e)

I believe that prior service can be counted as long as the partnership hadn't terminated under state law AND provisions are made in the plan document. In PLR 8240003, two sole-proprietors (H & W) incorporated their businesses and used that service in a DB plan for purposes of the DB plan's one-year of service requirement. Deductible SEP contributions reduce the P/S deduction limit. Aggregate limitations under Code Section 402(g) also apply--$12,000/$14,000, 415, and so on. If SARSEP top-heavy, follow provision in SARSEP (as to which plan receives TH contribution).

No. See above. I am not aware of any individually designed SEP rulings (other than relating to controlled groups, 415, and discrimination involving allocations ( e.g., uniform and cents per hour)). [ASIDE: if one were to submitted for approval, (very) arguably the $200,000 compenstion limit (imposed on model and prototype plans) under Code Section 402(h) would not apply. This might be attractive to a large employer with lots and lots of lower paid employees in an integrated SEP plan. If owners earn mega bucks, the 402(h) limit is artificially increased allowing an integrated contribution allocation of between $34,051 and $39,999.94.]

Answer is still YES. If contributions have be made for year and the plan is top-heavy, a minimum contribution may have to be made if there are any employees that must be covered for year. Although the sole-proprietorship has terminated (presumably, the only way it can under the tax code--by death of the sole-proprietor, although a formal change of entity classifacation might also be a termination), the affairs of the business still have to be wound up. This is generally handled by the executor/executrix. If a contribution is made for any employee for the year, a SEP eligible owner would be required to receive an allocation of the contribution for the year (even though they may not need it). Whether or not a SEP contribution should be made may depend on facts involved and other tax and non-tax issues.

For SIMPLE IRA purposes, compensation means net earnings from self employment (NESE) under Code Section 1402(a). One of the reductions in section 1402(a) requires a 7.65 percent reduction (for the 1/2 of SE tax deduction). Line 15a of Schedule K-1 -- if properly completed -- is your starting point. Line 15a comes from a worksheet in the instructions that takes into account that certain items allocated at the partnership level (like gains/losses from sale of business property, unreimbursed partnership expenses, oil & gas depletion) that need to be reduced/added back in determining the amount on line 15a. E.g, gain from the sale of business property has to be deducted in arriving at the line 15a amount; the gain isn't "earned income." At this point the contributions for non owners have already been deducted at the partnership level (to regular partners) to arrive at the amount on line 15a. Line 15(a) x .9235% = compensation for SIMPLE IRA plan purposes. Generally, this will be the same as the amount on line 4, Section A of Schedule SE (Form 1040). IMO, an owners total contribution (elective and maching/nonelective) can not exceed the .9235 amount. Contributions for nonowners can create a distributable loss. Hope this helps.