Gary Lesser

1. Statute of Limitation. I do not agree (nether did GCM 39019, ex 3) with your conclusion that seems to be based on a misreading of what you wrote above. The "return" mentioned in your uncited quote would be the 5329 not the 1040. Excess contributions and the appropriate excise tax are REPORTED on Form 5329, which must be ATTACHED to Form 1040. However, Form 5329 calculates a tax not otherwise reported on Form 1040 and Form 1040 does not provide for reporting the excise tax. Form 1040, requires that the "tax" from Form 5329 be entered in an area called "Payments" of which none were made. The GCM concluded that math error procedures may not be used when Form 5329 is not attached, even if it were possible to determine from other information on the return that an excess contribution had been made [which it could not in this case or in your situation]. The amount "reported" on Form 5329 is "paid" by entry on Form 1040, no more, no less. And as a consequence, the S of L will not run on an unfiled Form 5329. 2. Executed documents. Puffffff. Okay, the regs don't exist anymore; only the Code and DOL rules apply. The SEP must contain a "written allocation formula" for starters under IRC 408(k). Since a SEP is an IRA that must also satisfy other rules (like the written allocation formula), lets turn to the IRA rules that require a "trust" valid under state law (and which wd appear to have to be in writing to satisfy Code Sections 408(a) or (b)). If the trust does not exist, there can be no deduction under Code Section 404. No correction procedure can apply. FURTHERMORE, the DOL regs require a written document. Well, not, really; the alternative is to subject the plan to the FULL reporting requirements under ERISA (full SPD (just like a QP), Notices, and so on). You still haven't indicated whether the IRAs are model, prototype, or a vapordocs (or the trustee that's accepting such a program). Finally (not that there isn't more), how does this "thing" satisfy the "only if such written geverning instrument" requirements (of which there are several) of Code Section 408(a), first sentence. Even though you haven't specifically stated what was adopted, how, and what it contained, I strongly suspect that it does't amount to a plan. Even if it did, the ERISA problems could cause you to think that not having an individually designed SEP plan was a better position to be in. In a few days, i'm going fishing and hope to miss any further discussions on item 2 above. You just can't be serious and this can't be a real situation. You still haven't provided the ruling number for the IRS approved documents you referred to. Why not post whatever it is that constitutes the plan and we can all vote on it's validity as a SEP-IRA. Thus, we can play "Hang the Moderator or Hang the Initiator."

I hadn't notice that the IRS issued any PLRs specifically authorizing an elective SEP under 408(k)(6)? Do you have the ruling number so I can keep track of this interesting development? THX

Other than claiming the generic deducton on Form 1040 if self-employed or having elective amounts reported in box 12 of Form W-2, there is no direct reporting by the employer. Under ERISA, the employer should, however, retain a copy of its notice of contribution to employees that is required if a model document is used. Or, if a nonmodel integrated SEP, if the special notice for integrated contributions. There is no tracking of years. SEP contributions are properly reported in the year received by the trustee/custodian, rather than the year they are made on behalf of (i.e, claimed). Assuming these notice are not required for deduction purposes (of course meeting the rules of ERISA are important), amounts contributed after the end of the year may be claimed in either the current year or previous year. [To the extent that contributions may have to be "accrued," such rules may apply.] See, too, Rev Rul 76-28 (on point, but not necessarily applicable). Now, however, Prop. Treas Reg 1.408-9 requires a notice of contribution be given within a certain period after the end of the year (within 30 days, or by Jan 1) for all SEPs. Whether the IRS wd require this notice to have been provided to claim a deduction for a contribution made for example while under extension for a prior year is unknown. Nothing, that I remember, in IRC 404 seems to require a notice. Hope this helps. Perhaps others can share some thoughts.

MBOZEK 1. FORM 5329 Statute of Limitations DOES NOT RUN. In an IRS Service Center Advice (SCA 200148051 (Sept 20, 2001)), the Service indicated that the S of L will not run on an unfiled Form 5329. In the facts of the SCA, the taxpayer converted his Roth IRA in 1998 and elected to report the income over the four year period. The deadline for recharacterizing a year 1998 conversion was December 31, 1999. In April, 2000, the IRS issued the taxpayer a notice of unreported income. The additional income resulted in the taxpayer's income exceeding the $100,000 threshold, thus rendering the conversion invalid. The taxpayer filed Form 5329. According to the SCA, there is no statute of limitations on the Service determining that the Roth IRA is improper. Nor will the statute start to run on the 10% early withdrawal tax or the 6% excess contribution tax if a Form 5329 is not filed, meaning that these taxes can be assessed at any time. See, too, GCM 39019 (Aug 3, 1983); some of the examples of errors not eligible for the mathematical error procedures were: (1) a deduction was claimed on line 25, Form 1040 for contributions to IRAs but no code was entered to identify the type and number of IRAs; (2) a code was entered but the deduction claimed exceeded the monetary amount of the statutory limit for the type and number of IRAs indicated by the code; (3) an excess contribution was made to the IRA based on the deduction claimed, but no excise tax was reported on line 57-Form 1040 and Form 5329 was not attached to the return. In example (3), of that GCM further concluded that "even if it were possible to determine that an excess contribution had been made from the tax return filed, the GCM concluded that the excise taxes imposed by sections 4972 and 4973 could not be summarily assessed as math errors based on the Form 1040. Moreover the GCM concluded that there was no substantiation omission, within the meaning of section 6213(g)(2)(D) where a taxpayer does not attach Form 5329 to report excess contribution excise taxes. Excess contributions and the appropriate excise tax are reported on Form 5329, which must be attached to Form 1040. However, Form 5329 calculates a tax not otherwise reported on Form 1040 and Form 1040 does not provide for reporting the excise tax. Therefore, the GCM concluded that math error procedures may not be used when Form 5329 is not attached, even if it were possible to determine from other information on the return that an excess contribution had been made." 2. UNwritten SEP arrangements 2a. Do you really think a SEP can exist without numerous items being in writting and duly adopted by the employer? I'm not clear. In your world, does the underlying IRA have to exist or can it too be an unwritten "arrangement?" 2b. Do you believe that the regulations were written in a vacumn and do not embody what the law requires for an ordinary and necessary expense to be deductible? Would contributions be deductible or is it a tax-exampt organixation? 2c. Do you know the name of a trustee/custodian that will accept contributions under a nondocumented plan? 2d. How, for example, would the nondocument "insure that excess contributions are distributed" under IRC 408(k)(6)(F)? 2e. Do the DOL disclosure regulations (which are final) apply to this arrangment? How do you distribute this unwritten plan to the employees? Do you think the full ERISA reporting rules (SPD, Notices, and so on) would apply, or do you think the simplified reporting and disclosure procedures would apply (or is it an unwritten unapproved prototype)?

I don't agree with such a broad statement. A board resolution may be sufficient to establish an ERISA plan if it contains all of the elements required under the standard of Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc); Horn v. Berdon Inc. Defined Benefit Pension Plan, 938 F.2d 125 (9th Cir. 1991). However, a board resolution that merely authorizes the creation of a plan or approves a recommendation to establish a specific plan does not constitute the formal establishment of a plan. Cinelli v. Security Pac. Corp., 61 F.3d 1437 (9th Cir. 1995). See, too, Louisville Tin & Stove Co. v. Commissioner, 287 F.2d 887 (6th Cir. 1993) (board resolution approving adoption of plan is insufficient until final terms of plan have been approved).

NO, NO, NO, NO. 1. The requirment of a written SEP is embodied in IRC 408(k)(5) -- "written allocation formula." It is also embodied in several other sections. A SEP is an IRA that satisfies additional rules. It must be in writting to satisfy the rules. See IRC 408(k). See. too, 1.408-7(B)-- Either the plan is adopted or it isn't. If it isn't, then there is no plan. How/whether it's adopted is a matter of state law. If it can't be found, then it does not exist!! The ability of an employer to establish an account for an employee is not mandatory. Failure to do so, however, means that there is no valid plan for the year. Further, under proposed Section 1.408-7(d)(2), employers may execute necessary documents on behalf of employees who are unwilling or unable to execute those documents or whom the employer is unable to locate. This remedial rule prevents an employer's SEP arrangement from being disqualified because of a recalcitrant employee or one who has left the employer's service and is unable to be located by the employer. (See also proposed Section 1.408-9© for possible reporting requirements in this instance.) Comments were requested in 1981 as to what alternative remedial action, in lieu of execution on behalf of employees, employers would wish to take to avoid disqualification of their SEP arrangements. Comments were also requested on the proposed rule as to whether in a particular State there is any law that would preclude this action by the employer on the employee's behalf. Employer contributions which exceed the amounts called for under the written allocation formula for the SEP arrangement are treated as if made to the employee's individual retirement account or individual retirement annuity, maintained outside the employee's SEP. It is contemplated that the employer, when it discovers the erroneous contribution, will notify the employee of the amount of the non-SEP contribution made in excess of the allocation formula. Because this amount may result in an excess contribution when made the employee may wish to take appropriate action in order to avoid IRA penalties. The normal IRA rules under Code section 219 apply in such a situation. This rule was proposed in order to prevent the entire SEP arrangement from being disqualified due to an inadvertent error on the part of the employer, such as an incorrect calculation of employee compensation. Under Code section 408(k), the entire SEP arrangement could be disqualified on account of the excess contribution. This rule was proposed to provide relief in such cases. See proposed Section 1.408-7(f) and the example of how the rule would operate in a particular case. If a document states that it must be fully completed to be effective, why do you believe that such a requirement doesn't apply? 2. The S of L does not expire when the employer fails to file form 5330 to pay the 10 percent tax on nondeductible contributions. See IRC 6501© regarding "false returns," "willful attempts to evade tax," and "no returns." 3. Form 5329 is used to pay the 6 percent tax on excess IRA contributions. With no form filed, it wd appea that the S of L does not start. 4. The amount of unreported tax may be of concern, as criminal penalties cd be also involed. 5. See SEP Audit Guidlines in IRM 4.72.17. The IRS will audit about 330-420 SEPs in 2003, see SEP Nation Wide Program FY 2002. The program will review the 2000 tax year.

Is it possible that a signed agreement was submitted to IRS? Can get copy under FOIA. Was it aproved by PLR or determination letter request? If DLR, was it submitted to IRS in proposed or final form? What does the determination letter say? Were its terms followed? Any caveats on it? Was it approved or withdrawn? Can you send me copy of determination letter (fax 317.254.0386) Without an executed agreement there is no plan. Corrective procedures do not apply to a plan that does not exist.

Assuming the MP plan was terminated in an earlier year or that there is no minimum funding obligation for the current year, a SIMPLE wd be allowed. In your case, it seems as though the SIMPLE has turned into a complex. On Form W-2 include the excess in box 1 (do not include the excess in box 12). The excess amounts in the IRAs need to be removed timely by their owners to avoid penalties. Unfortunately, there are no excess contribution notices/explanation that are required to be made. It would be a good idea to distribute one so that it can be included in the request to the trustee/custodian by the participants to make the corrective distribution. If within two years, the 25 penalty wd not apply. With the employer's notice, the trustee/custodian may possibly code the amount as a return of an excess, rather than as a regular distribution (subject to 25% penalty).

IRC 402(h) was created in 1986, effective in 1989. But that's not really the beginning. The prior SEP limit of 15 percent, the old DC 415 limit, the TWB limit, and the considered compensation limits haven't made the reduction apply for many years (1994-2001); that is, the maximum contribution limit was always far below the reduced 415 limit. In earlier years (and after 1986) the high compensation limit caused a reduction of the $30,000 limit under 415. For years prior to 1986, see 408(k)(3) as it then existed. It also allowed for integration--of the "offset" type. When the law was changed and 402(h)(2) came into existane (and changing 408(k)(3)) the legistlative history stated: "Subparaghs (D) and (E) of section 408(k)(3)...AS IN EFFECT BEFORE the amendments made by this section SHALL CONTINUE to apply"...[then regarding SARSEPs] "may not be integrated." {Emphesis added.} [see PL 99-514, Sec 1108(h)(2), as added by PL 100-647, Sec 1011(f)(7) (the technical corrections)] Note: The concept originally applied to the maximum contribution which as a stated dollar amount ($7,500, $15,000, $30,000) was "offset" by another amount (5.7% of compensation up to the TWB limit) if integrated [this was before the 402(h)(2)(B)/415 tie in in 1986].

The employer can (MUST) establish SIMPLE IRAs at another institution that accepts contributions as soon as administratively feasible (read: "fast"). Regulations even permit employer to establish documents when employee refuses to establish, can't be located, and so on. The check can be deposited and replaced with an employer check.

Nobody thinks so. The contribution must be made. [Prop Treas Reg 1.408-7(d)(2)]

For 2002, a $37,019.70 contribution (14.3% base percentage / $84,900 TWB / 5.7% spread) will yield: $35,160.70 for Owner (HCE) earning $800,000. [$40,000 if not ingegrated.] $1,859.00 for employee with $13,000 (W-2). [$2,600 if not integrated.] The IRC 402(h)(2)(B)/HCE limit is: $35,160.70 = $40,000 - ($84,900 x .057) Base Percentage equals 14.3% ($35,160.70 - [($200,000 - $84,9000) x .057] / $200,000). [Here, $200,000 is the EI as computed under IRC 401©(2), then capped at the $200,000 limit.] Here, with only one employee, for an extra $741, the owner can get an additional contribution of $4,839.30. Thus, it appears that it would be better to duplicate benefits (i.e., by not integrating contributions with social security) and contribute $42,600. Although the defined contribution plan integration rules now apply to SEPs, the IRC 402(h)(2)(B) reduction causes the integration benefit to be "offset" against the maximum limit. When SEPs had there own integration rules, the maximum limit was also offset by the TWB times the O.A.S.D.I. rate (5.7%) for all employees. Any amount that exceeds the limit is reportable on Form W-2 as "wages" or not deducted if self-employed.

If this is a State Marshall, then it is a matter of State law. What state does the owner and trustee/custodian reside? Perhaps a member will know your state's rules. They will obviously need to know who the trustee (legal owner of account) is!

A tax-exempt organization may establish a SIMPLE-IRA. [iRC 408(p)(2)©(i)]

None. The 2 percent nonelective employer contribution is not dependent on elective contributions made by employees. There is no required minimum elective contribution/participation requirement in a SIMPLE-IRA; so long as the employees had the right to contribute under the terms of the plan. Incidently, the employees are treated as "active participants" for 2002, even though the nonelective contribution may have been made after the end of the year.

A "Complex" is my term for a bad SIMPLE-IRA. It's not in the Code, but should be. Thanks for your participation.

What types of business entities were the two organizations? Exactly what was sold and purchased? Assets and Liabilities? Stock? If sole-proprietor was he alive at time? Just name and goodwill? And so on. Does the seller have/retain any interest in the new entity. This may be a good question to ask Derrin Watson once you can put all the facts together.

It would appear so. The employee would have to request the correcting distribution from the SIMPLE IRA. May I suggest that the employer prepare a letter of instruction that could then be use by the employee in convincing the trustee that the distribution is a return of an excess contribution (gain aside) and should be reported that way AND not subject to the 25% penalty.

Since there is no SIMPLE IRA account, I see no reason why it can't be returned to employer for timely deposit into an existing SIMPLE IRA. The account must be established - see above.

It is an interesting issue that has never received much attention; until now. Section 414 does apply to SEPs. If the corporation existed at any time during the SEP year, then they are controlled entities and all service with either entity counts for everyone. If not, then it would depend upon whether the plan of the SE is adopted by the Corp (service counted) or whether it is a new plan (must wait for regulations to be issued - we've been waiting now for almost 30 years). As a new plan you would have to use "zero" eligibility so that the plan has participants for the first year.

The SIMPLE-IRA is "invalidated" [now a "Complex" !!]. All SIMPLE IRA contributions for 2002 are prohibited excess contributions. See post "SIMPLE IRA: sole proprietor: return of contributions." Unofficially, the 25% (within 2-year) penalty does not apply if corrected timely. [ASPA 2001 IRS Q&A #36, when employer adopted a QP]. Assuming contributions were made to the QP for 2002-2003, there isn't much that can be done. Include the simple excesses on Form W-2 box 1 (only) or as EI (if SE).

The employer can not recover the contributions. See other posts in this section. Your question is under active consideration by the technical wizards that participate on this site.

Appleby, The amendment made to IRC 408(d)(7) by PL 105-206 (Sec 6018(B)), seems to suggest (strongly) that both 408(d)(4) and 408(d)(5) correction procedures apply to SIMPLE-IRAs. Arguably, SIMPLE excesses returned after the due date would not be taxable again (under 408(d)(1) -- assuming it applies). And that may be a big assumption. Since there is no way of paying the 6% tax and 10% tax, one has to question how excesses ARE to be treated. I think the W-2 takes care of the 10% penalty (if excess shown in box 1 as indicated, or reported as EI if SE). As a technical correction, Section 6018 did not have any legistlative history to guide us. With the IRS hesitant to give any advice, I don't think we have an answer that we can safely hang our hat on yet.

Prototype LRM language also requires compensation for the entire CY be used.

Appleby, Can you provide the exact cite to the Act or the Preamble (and fax me the page) that says this? [Thanks.] I am not aware of any IRS guidance having ever been issued. I agree that 408(d)(4) and probably (d)(5) apply. It sd be noted, however, that Form 5329 does not seem to apply in paying the excess contribution penalty. Nor does Form 5330 seem to apply regarding the 10% tax on nondeductible contributions. The IRS has been very hesitant to address this issue. Although, representatives of the IRS very "informally" stated that the 25% penalty would not apply (under the 2-year rule) to an excess (when the employer later adopted a QP for the year). No mention was made of the 10% penalty. [ASPA Q&A, 2000, Q 36]. Seems like a PLR is the only solution for a definitive answer. IMO, it should be removed before the due date with gain. If received after the due date the amount will be taxable (again) upon withdrawal (and maybe that's why the 6% penalty doesn't apply). IRC 4972 does not specifically include simple IRAs as qualified plans subject to the 10% tax on nondeductible contributions. [Appleby, see Simple, SEP, and SARSEP Answer Book, Qs 14:61-14:64] The code is not very helpful other than stating a SIMPLE IRA is a traditional IRA that must meet some additional requirements. The IRS seems to believe (and for good cause) that there is no such thing as a SIMPLE excess because Congress didn't pass any law making it so. No penalty, no law.!!