Gary Lesser

Yes, but no amount is actually contributed "as" a catch-up contributions. By definition, a catch-up contributions is an elective contribution that exceeeds a statutory limit. Except in the case of an eligible 457 plan, the annual limits for elective and catch up contributions are applied on a plan and on an individual basis. If the employers are unrelated, generally neither have to consider the existance of the other plan. See instructions on the back of Copy C of Form W-2. The individual would have to report elective contributions or catch-up conbtributions in excess of the applicable limits on Form 1040, line 7. Examples. (a) A non-HCE with lots of compensation makes a $12,000 elective contribution to 2 plans (nether of which are eligible 457 plans). $12,000 must be reported in gross income. (b) Assume the individual IS an HCE and his elective ADP contribution was limited to $9,000. $2,000 would be a catch-up contribution under the plan; and there wd be an excess contributions of $13,000 ($12,000 + $1000 ($12,000 - $9,000 - $2,000)). Hope this helps.

Okay, the Sole-Proprietorship adopted the P/S plan in 2002. Therefore, the individual could be eligible under the plan. The plan wd normally define his compensation as his earned income. The contribution, however, wd have to be made by the entity that adopted the plan (and that entity does not appear to be under extension). Thus, any contribution made after the due date may not be contributed or deducted for the 2002 tax year. If the sole-proprietor was under extension, things wd be different. If the sole-proprietor has common-law employees, the P/S plan may become discriminatory (if contributions are made to it for 2002) because of the "controlled" group rules that treat all employees of all members of the controlled group as if treated by a single employer. Arguably, the corporation could make the contribution, but the amount would not be deductible (not ordinary and necessary) and would be subject to a cummulative (forever) 10% penalty tax (unless and until corrected). If this were a community property state, it may be possible for controlled group status to be avoided under the noninvolvment exception to spousal attribution (if so, see IRC 1563(e)(5)).

I believe the answer to your question is "no" (unless the entities file a consolidated return; which I doubt they do or could qualify for) But, JIC, can you explain what "became a participating employer in a company's profit sharing plan" means. What documentation is there? Is this a community property state? Where contributions ever made to the SEP (were employees of corporation that wd have been eligible also covered by SEP)? Are there other employee's in wife's corporation.

Although the form is not that clear in regard to your issue, there may be limitations under Code Section 415 that may need to be in the SEP plan since the terminated plan's provisions no longer apply. IMO, the "currently maintain" language should be looked at on a plan year/taxable year basis. If there is any overlap, then I would suggest using a prototype. They can be integrated to avoid discriminating against higher-paid participants, by giving them more!

Could you provide some more detail on the relationship between the sole proprietorship and the entity that sponsors the PS retirement plan. Is a tax exempt-entity involved? Are the entities related, controlled, or affiliated under the Code? Does individual own more than 50% of other entity? Is the PS sponsor under extension for 2002? Sole proprietors generally do not participate in the plans of other entities unless they are related, controlled, or affiliated with such other entity and the plan includes them. Does individual also have W-2 income from entity sponsoring plan? In general, an individual may be able to maintain SEP as a sole-proprietor and also be a participant in an unrelated "employer's" plan to the extent of his or her compensation from the employer maintaining that plan.

Perhaps everyone is correct -- the "required" matching contribution amount just happens to equal $0. [iRC 408(p)(2)(A)(iii)]

An attorney with Mullen & Henzell in Santa Barbara, CA, recently received a Compliance Statement on an Employer Eligibility Failure under Revenue Procedure 2003-44. The IRS did NOT impose the additional 10 percent fee on the "Excess Amount" (elective and matching contributions made over a 4-year period) that were permitted to be retained (remain) in the SIMPLE IRAs (subject to IRC Sec 408(p)). The attorney made a very convincing argument as to why the penalty should not apply. FFI, the attorney's name is Christine P. Roberts (805) 966-1501.

The IRA is subject to the UBI tax (if the UBTI is in excess of $1,000) per year. The tax is imposed on the IRA for UBTI caused by operating a business or investing in debt-financed property. In most likelyhood, the IRA trustee will have to pay the amount and the owner may be responsible for reimbursing the trustee. WHAT does the document say about the payment of taxes (or how does the plan sponsor interpret the agreement)? If the tax is paid by the individual, it would be treated as a contribution to the IRA and subject to the annual limit amount (generally $3,000). If the amount can be rolled back into the IRA (or transfered from another IRA) and the taxes paid from the IRA the taxable distribution amount may be lowered.

That is the best situation to be in. EI is considered as earned on the the last day of the year (whether or not the amount is then known). April 15 is just the date that returns are to be filed (hopefully one does not wait until 4/15 to determine their P&L). The only issue is when must the amount be contributed so as not to violate the DOL's plan asset regulations. In the case of a sole-proprietor (and partners too), the amounts must be elected to be deferred before the end of the year. It would appear to be better to make a contribution that is later found to be an excess (and corrected) than to remit a contribution after the "earlier of" rules. Logically, the rules should be the same, but are they? That is the issue. The basis upon which "partners" may possibly have longer period (i.e. the partnership regulations) can not be said to apply to a sole-proprietor, because a sole-proprietor is not subject to the partnership rules. Neither the Preamble, regulations, or private letter rulings have ever addressed this issue. No other guidance has been issued. As mentioned by KJohnson, the plan asset regulations (under ERISA) may not apply to a sole-proprietor with no common-law employees. In which case, the tax-filing date would be the deadline for deduction purposes. If ERISA applies, the statute appears clear that for a sole-proprietor elective contributions must be forwarded by 1/30, and possibly sooner.

All that can be said is that they can eventually maintain a SIMPLE IRA in the year after they get small enough. The 100 employee limit is based on the previous year census (and the $5,000 threshold if provided for). Although not indicated in your facts, Code Section 408(p)(2)© provides a grace period for employers that grow too large due to an acquisition, disposition, or similar transaction by an eligible employer.

No. The assets in the SEP IRAs are not taken into account in determining whether the $100,000 plan threshhold was reached for purposes of the Form 5500-EZ.

I agree entirely. You raise an interesting issue (which as you mentioned is pending in the Supreme Court). The issue: Whether the working owner of a business (here, the sole shareholder of a corporate employer) is precluded from being a "participant" under ERISA Section 3(7), in an ERISA plan. The facts. A few months prior to filing his bankruptcy petition, this guy sells his house and repays his 401(k) loan. The trusee in B'ruptcy want the reapayment returned as a "fraudulent conveyance." That will/may depend upon whether he is/can be a participant in an ERISA plan. If the fraud can't get corrected (and his plan assets are protected), then there is a possibility that the individual may not be entirely discharged of his debt. Either way, he will probably lose. But the issue is important. SEE PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT at: CLICK HERE for PETITION In part, it states:

Please keep us informed as to what actually does happen. I think they will, so be prepared. What went wrong with the SIMPLE IRA? What type of failure? For some falures the 2003-44 corrections methods are absurd and nearly impossible to effectuate without a DOL advisory opinion or exemption letter if the plan is covered by ERISA. The IRS appears to be under the impression that a trustee or custodian will make distributions upon the request of the employer. I do not believe that they will. Even if the IRS stated that they must, there is still DOL and state law issues to be considered.

The excess should be included on Form W-2 box 1 (but not included in box 12). Arguably, this is sufficient to eliminate the 10 percent penalty on nondeductible employer contributions. The bank shd be shown a letter of explanation on employer letterhead (not required, but helpful) stating what happened and that the amount ($___) WILL BE included on ____'s W-2 box 1 (wages) for 2003. The individual's letter (enclosing the above) sd request that the amount be recoded on Form 1099-R) as an "excess contribution returned before the due date." [Any distribution of gain may be taxable and subject to the 10 percent tax if under age 59-1/2 unless an exception applies.] Arguably, neither the 10 percent or 25 percent penalty applies to the return of the excess even if under age 59-1/2 if it is treated as such). You might want to add what the IRS has said (see following example). Example. An employer established a SIMPLE for 2003. On June 8, 2003, the employer adopted a qualified profit sharing plan and made contributions to such plan for 2002. According to informal guidance, corrective distributions would not be subject to the 25 percent penalty. [ASPA National Conference, 2000, IRS Q No. 376] On September 25, 2000, in Arlington, Virginia, representatives of the ASPA (American Society of Pension Actuaries) met with three senior IRS employees: James E. Holland, Jr., Chief, Actuarial Branch I; Paul Shultz, Director of Employee Plans, Rulings and Agreements; and Richard J. Wickersham, Chief, Projects, Branch 2. The IRS representatives stated that the 25 percent penalty would not apply when an employer adopted a 401(k) plan invalidating the qualified salary reduction plan a SIMPLE. The meeting served as the basis for discussions at the ASPA National Conference. Although accurate, the statements do not represent official positions of the IRS, nor were they reviewed or approved by the IRS or the Treasury Department. I see no reason, why the above would not apply to an excess contribution. The 25% penalty (see above) sd not apply. The 10 percent penalty sd not apply to the distribution of the excess because the amount is nontaxable (if it was also included on Form W-2 issued by the employer). WITHOUT SOME FORM OF EXPLANATION THE TRUSTEE/CUSTODIAN HAS NO CHOICE BUT TO CODE IT AS SUBJECT TO A 25% PENALTY. IF THE EXPLANATION DOESN'T WORK, then file Form 5329, show $0, and provide an explanation and supporting materials as to why the penalties do not apply. But it must have been reported on the W-2 for this to work properly. See From 5329, fill in item on line 2 of Part 1. Arguably, if the amount was left in (had it not been withdrawn ever) it would be subject to tax again when distributed [to extent it exceeded the allowable correction amount under IRC 408(d)(5)] even if included on Form W-2, but the 6 percent tax does not appear to be a problem either way. It could be removed in smaller increments and possibly escape double taxation. The employer wd have a problem if excess not included on Form W-2. I'm not sure what would happen if excess is properly removed and amount was not included on Form W-2. If amount removed, then maybe employer does not have major problem, but may cause the individual a double taxation issue at some point. I expect some disagreement here, but may not be able to respond for a few days. Before you do, however, see instructions on back of Form W-2 for completing box 12. Furthermore, and notwithsatanting all of the above, the SIMPLE IRA excess contribution and correction rules are not clearly set forth by the Code or in IRS guidance. So, there you have it - my opinion. Fire away....

There is no safe harbor. Perhaps it is not all that clear. Under the Code there is a 30-day period. Under DOL rules (i.e., ERISA), however, the 30-day period is NOT a safe harbor if the assets could have reasonably be segregated from the employer's general assets any sooner. [DOL Reg 2510.3-102] As noted, deduction rules differ. Partners may have a longer period. [see, DOL Reg 2510.3-102, Preamble] and may even pre-pay based on their "advance payments" (assuming ultimately that their EI can support the contribution)(see PLR 200247052; which neither included or excluded sole-proprietors from its "advance payment" application). A sole proprietor has nothing to hang his/her hat on for making a contribution later than the earlier of 30-day period or the date the assets could have been reasonably be segregated from the employer's general assets. It is my understanding that the justification for the materials in the previously mentioned Preample was based on the partnership regulations that have no direct application to a sole-proprietorship. Thus, any extension of the "eralier of" time periods could be treated as a fiduciary violation of the 2510.3-102 plan asset regulations

Beware of maximum limitations. Keep in mind that contributions must first be allocated to the MPPP. Thus, if aggregate limits are exceeded, the prototype SEP contributions are limited/reduced (e.g., the $40,000 limit). Beware, most, but not all prototype SEPs permit their use with a qualified MP plan. Assume a 10% prototype SEP and a 15% MPPP. The total contribution can not always be allocated 40/60. For example. With compensation of $200k, owner receives $30,000 ($200,000 x .15) in the MPPP. Only $10,000 may be allocated to the SEP. Here, 25/75. If the MPPP were integrated with Social Security contributions, the SEP contribution wd have to be smaller or non-existant to be effective. If this type of a situation exists, care shd be taken so that the employees do not receive any more than they have to (by adjusting the SEP contribution to provide the owner with a specified dollar amount). Assume a $40,000 MPPP contribution, having a SEP wd not provide owner with additional retirement plan contributions, deductions would increase, perhaps too loyalty; but at what cost(?). Hope this helps. p.s. Appleby, Butler, and Belgarath are correct.

Cite: See Proposed Treasury Regulations Section 1.408-7(d)(2) regarding execution of documents and example in 1.408-7(d)(5).

Cite: See Proposed Treasury Regulations Section 1.408-7(d)(2) regarding execution of documents and example in 1.408-7(d)(5).

A reasonable rate of interest would be required under EPCRS - would this, however, be considered an "egregious failure"? Do see the DOL's Voluntary Fiduciary Correction Program. The client has violated ERISA by dealing with the assets of the plan. Also, the plan--as it turns out-may also have a bonding requirement issue. The employer sd hire an ERISA attorney a.s.a.p. I can recommend one if needed that has already submitted applications under the new Rev Proc. If it "intentionally" filed incorrect W-2 it may have also committed tax fraud. The employer may also have to pay/pick-up employee's costs to correct.

If no SIMPLE contributions have been made for the year to a SIMPLE-IRA, the plan can be abandoned (state law issues aside). There are no complications. OTOH, if it's a 401(k) Simple, then any changes can be effective no earlier than the following calendar year.

It is IMPORTANT to understand that the IRS no longer answers common questions--the No Help Service-- since there is no common law. However, upon the payment of a user fee ($2,100 I think) all your questions can be answered. The excess should be reported in box 1 (only) of Form W-2 (see text of instructions on Form W-2). I no longer believe that the employee is subject to the 6 percent penalty. Under EPCRS there may be other approaches (see Rev Proc 2003-44 Section 6.10(5). All this being said, there is no clear answer. [The Rev Proc calls for the employer to "effectuate" distributions, which is difficult to comprehend because an employer has very no control over the trustee/custodian. And the transaction wd also see to be prohibited.] It seems that Congress may have forgotten to add the 6 percent penalty for an over contribution. The IRS has also stated (informally) the none of the contributiuons to any of the accounts are any good, i.e., no SIMPLE/bad SIMPLE (I call that a "complex"). But, even so, there is no guidance on that either. When corrected after the due date, the amount that may be corrected (the normal IRA limit + SEP contributions) without taxation, is not increased on account of SIMPLE contributions. So, a failure to correct timely (before the due date) may subject "excess" amounts later distributed to double taxation. It wd appear, too, that the 10 percent penalty is avoided by placing the excess on the employees W-2 (box 1). But again, no guidance.

Although a qualified plan can be adopted, the SEP can not be amended into a qualified plan. If a 401(k) is adpted, contributions under the SEP reduce the allowable maximum profit-sharing limit dollar-for-dollar. [iRC 404(h)(2)] The SEP can be terminated by resolution and a notice of the effect of the amendment (with copy of amendment) provided to employees. There may be top-heavy issues, especially if partipation requirements differ.

Yes, the excess is reported in box 1 (and not deducted on Form 1040). Although they do not seem to be subject to the 6% tax (no spot on Form 5329, because its not treated as a "traditionall IRA" for purposes of that tax), the excess sd still be dealt with by the participants. I'd provide a notice explaining what happened and how/when it sd be corrected. The notice will be helpfull to the trustee in coding this as a nontaxable excess. Gain cd be taxable and may be subject to the 10% penalty if not 59-1/2.

Assuming no employees (no state law issues), yes and no. Although the contribution can still be made by the executor, it doesn't have to be, and (if not) the SIMPLE will not be a simple for the year. Excesses will have to be dealt with. Why not make it? Probably better to pass it on in the IRA.

There is a late deposit of the employee's funds under DOL rules, although the amount may be timely for deduction purposes up until April 15 (plus extensions). There are rules that allow partners to defer when their EI is determined (as of 12/31) after the end of the year. It is unclear whether these rules wd apply to a sole-proprietor since they were based on the "partnership" regulations. State law would probably require that the contributions be made. State law aside, the employer has stolen the employee's funds under the ERISA "plan asset" regulations. Correction procedures: It depends, is it a Simple IRA or a SARSEP? If a SEP, is it top-heavy, and will the employer be making a nonelective contribution? Contributions are not coded by the trustee by year. They may generally be claimed in accordance with the deduction rules when made after the end of the year. No specific designation is required. In your case, they seem to have been deducted in 2002, making them 2002 deferrals. Sure, there are other fixes. But, most people don't like to sleep with one eye open.