Gary Lesser

If the employee is unable or unwilling to open an IRA (or can not be located) the employer MUST open the account on behalf of the employee (at any financial institution) if it is to have a SIMPLE-IRA (for any employee) for the year. See Notice 98-4, Q&A, G-5 and G-6]

Yes. The only exclusions permitted (other that years/compe) is for union/nonresident alien (IRC 410(B)(3)). [iRC 408(p)(4)((B)]

Here's the IRM mentioned above. UILC: 408.03-00; 72.20-00 Release Date: 8/20/1999 Date: June 24, 1999 CC:EBEO:Br7 MEMORANDUM FOR * * * FROM: Chief, Branch 7, Office of Associate Chief Counsel (Employee Benefits & Exempt Organizations) (CC:EBEO:BR7) SUBJECT: Review Of Advisory Opinion Concerning Ira Distributions [1] This Field Service Advice is in response your request for our views regarding your memorandum to Chief, Examination Division, * * *. Field Service Advice is not binding on Examination or Appeals and is not a final case determination. Field Service Advice issued to Examination or Appeals is advisory only and does not resolve Service position on an issue or provide the final basis for closing a case. This document is not to be relied upon or otherwise cited as precedent. LEGEND: X = * * * Y = * * * ISSUES [2] Whether the Service has the authority to waive the 60-day rollover rule of I.R.C. section 408(d)(3)(1) and the early distribution tax under section 72(t). CONCLUSION [3] The Service does not appear to have the authority to waive either the 60-day rollover rule of section 408(d)(3)(1) or the early distribution tax under section 72(t) under the circumstances of this case. [4] X, an individual doing business under the name Y, provided accounting services primarily with respect to estate and trust work. Between 1989 and 1997, X, in addition to providing legitimate accounting services, misappropriated funds from 22 clients, friends, and relatives by convincing them to make investments in either a partnership venture or a mutual bond fund and subsequently embezzling their money. Many of X's victims obtained funds for the investment by making withdrawals from qualified tax deferred accounts such as IRA's, and apparently believed that the new investments would receive tax-free rollover treatment. [5] On January 6, 1999, after being the target of a criminal tax investigation, X pled guilty to mail fraud and income tax evasion based on the unreported embezzlement income. Until recently, X's victims were unaware that he had defrauded them. After learning of the embezzlement, the victims contacted the special agent on the case regarding the tax consequences stemming from their lost investments. It is unknown whether X spent all the embezzled funds or whether a portion of the funds is available to satisfy claims of the defrauded investors. LAW AND ANALYSIS [6] In your memorandum to the Examination Division, you conclude that the Service should waive the 60-day rollover period for those taxpayers whose funds were embezzled if they replenish their IRAs with funds from other sources within a reasonable time. In reaching this conclusion, you rely upon Wood v. Commissioner, 93 T.C. 114 (1989), Childs v. Commissioner, T.C. Memo. 1996-267 (1996) and PLR 9234016. Based upon the facts presented, the taxpayers' situation appears to be distinguishable from this authority, and we do not believe that the Service has the authority to waive the rollover period absent additional facts that bring the taxpayers within the ambit of Wood. /1/ We similarly believe that there is no basis to waive the additional tax for early distributions under section 72(t). Our reasons are discussed below. [7] In Wood, the taxpayer received a lump sum distribution and stock shares from a profit sharing fund. The taxpayer met with an account executive of a national brokerage firm where he had an existing non-IRA account in order to establish an IRA into which he could roll over the distribution. The taxpayer signed documents to establish the IRA and instructed the account executive to deposit the lump-sum distribution into the IRA. The taxpayer physically delivered the lump sum distribution check and stock certificates to the account executive at that time. The brokerage firm's records indicated that a portion of the distribution was recorded as having been transferred to the other account that the taxpayer maintained with the brokerage firm. Four months after the expiration of the 60-day period allowed for rollover, the brokerage firm corrected its records to reflect transfer of the remaining portion of the distribution to the IRA. The court held that under these circumstances, the 60-day rollover period of section 408(d)(3) was satisfied because the money was delivered to the trustee of a valid IRA rollover account and the failure by the brokerage firm to record the transfer was a mere bookkeeping error. [8] In Childs, the taxpayer opened two IRA accounts with a bank and deposited a distribution which she later learned was not eligible for tax-free rollover treatment. In order to qualify for relief under section 408(d)(4), the taxpayer was required to withdraw the excess contributions on or before August 15th of the year at issue. Although the taxpayer verbally instructed the bank to convert her IRA account into a non-IRA account, this request was not completed by the bank until after August 15th. The delay was the result of a failure on the part of the taxpayer to complete necessary documentation. However, the court found that the taxpayer had exercised diligence in phoning the bank, and had been misled by a bank employee into believing that it was not necessary to execute any bank documents to convert the account. The court held that since the taxpayer took all necessary steps to withdraw the excess funds by the required date, relief should be granted. [9] PLR 9234016 dealt with the tax consequences of embezzlement by a bank officer. The officer had issued worthless certificates of deposit to account holders in exchange for funds. The bank reimbursed depositors who could demonstrate that they had made deposits for the purchase of worthless certificates. The Service ruled that amounts restored to the depositors' IRA's were not taxable to depositors. [10] In our view, two facts distinguish the taxpayers at issue from the taxpayers in the cases and ruling cited above. First, the taxpayers at issue have not established that they were dealing with an individual that they had a reasonable expectation to believe had the authority to establish an IRA, such as an employee of a bank or a financial institution. Although the facts indicate that X provided accounting services, there is no mention of his qualifications as an IRA trustee. In Wood, Childs and PLR 9234016, the taxpayers were each dealing directly with individuals who were employees of financial institutions and therefore would have met the qualifications for IRA trustees within the meaning of section 408(a)(2). Second, although the facts indicate that the taxpayers at issue believed that the money would be deposited into accounts that would qualify for tax- free rollover treatment, there is no evidence that they ever took the steps required to set up these accounts. Rather, it appears that the taxpayers merely gave their money to X and requested that he invest it for them. This fact distinguishes the taxpayers at issue from the taxpayer in Wood, who had completed the paperwork necessary to establish the IRA rollover account, and from the taxpayers in Childs and PLR 9234016, who maintained accounts at the institutions that effectuated the transfers. [11] Although you have drawn an analogy between the instant case and Wood, we believe that the holding in Schoof v. Commissioner, 110 T.C. 1 (1998) actually controls. In Schoof, the Tax Court held that where a taxpayer gives a distribution intended as a rollover to a trustee who is not qualified under section 408(a)(2), rollover tax treatment is denied, and the taxpayer must include the distribution in income. In reaching this decision, the court specifically held that Wood was distinguishable because it merely involved "procedural defects in the execution of the rollover" rather than "the failure of a fundamental element of the statutory requirements . . . the qualification of the IRA trustee." Schoof at 11. The court also held that based upon the legislative history of section 408(a)(2), individuals are per se ineligible to serve as trustees for IRA trusts. In the present case, it is unlikely that X could be considered a qualified trustee since he appears to have acted in an individual capacity, even though he did business under the name Y. Accordingly, under the holding of Schoof, the taxpayers who gave him distributions failed to satisfy a fundamental statutory requirement, and should be required to include the amount of the distribution in income. This result is not changed simply because X embezzled the funds. [12] Even if X were considered to be a qualified trustee, Orgera v. Commissioner, T.C. Memo. 1995-575 demonstrates that although a taxpayer may believe that he has done everything necessary to effectuate a rollover, the 60[day]-period is nevertheless strictly construed. In Order, the taxpayer deposited his pension distribution in a money market account at his company's credit union and argued that he should receive tax-free rollover treatment because he believed he was making a qualified IRA deposit. In Orgera, as in Schoof, the court specifically declined to extend the Wood rationale, and denied rollover treatment since the taxpayer failed to make a timely transfer of the distribution to an IRA that met the statutory requirements. Similarly, despite their intentions, the taxpayers in the present case failed to meet the statutory requirements necessary to achieve rollover treatment. [13] In addition to the above cited cases, one private letter ruling supports our finding that there is no legal basis for the Service to waive the rollover requirements or early distribution tax in this case. PLR 8815036 involved a taxpayer who gave IRA funds to an embezzler with the mistaken expectation that the funds would be deposited to a qualified retirement plan within 60 days. In this ruling, which is directly analogous to the instant case, the Service denied rollover treatment even though the taxpayer deposited the funds to the plan after they were recovered because the 60-day period was not met. In support of its position, the Service states: The Code does not provide relief from applicable taxation where the taxpayer intended to rollover funds from one IRA to another, and in fact fails to do so or places the funds in an investment vehicle other than an IRA. Therefore, the transfer of funds to an individual instead of an IRA does not constitute a complete and timely rollover. [14] In PLR 8815036, the Service also ruled with respect to section 72(t) that the 10% additional tax applied because none of the exceptions were satisfied. We believe that this is the correct conclusion. [15] In our view, there is no legal basis to waive the additional tax for early distributions under section 72(t) in the instant situation unless the taxpayers meet one of the exceptions set forth in the statute. Although you cite Larotonda v. Commissioner, 89 T.C. 287 (1987) and Murillo v. Commissioner, T.C. Memo. 1998-13 in support of the theory that section 72(t) tax should be waived where a distribution is involuntary, the Service has specifically declined to adopt the position that section 72(t) tax should be waived in instances of involuntary distributions. /2/ Even if the Service applied this standard, however, the fact remains that these taxpayers voluntarily withdrew funds from their IRA's and transferred those funds to X. This distinguishes them from the taxpayer in Larotonda, whose distribution was the result of a levy, and the taxpayer Murillo, who forfeited his IRA to the government as part of a plea agreement. [16] In summation, based on the facts presented, we see no legal basis for relief with respect to the rollover issue because the taxpayers' situation appears to be distinguishable from those cases and private letter rulings that disregard a taxpayer's failure to follow literal statutory requirements. In addition, the requirements articulated by the court in Schoof do not appear to be satisfied. The taxpayer's situation appears similar to Orgera where the court declined to grant relief even though the taxpayer intended to make a tax-free rollover. However, if any of the taxpayers are able to prove additional facts that would narrow the distinction between their case and Wood, we should consider such facts carefully. Barring such a showing, the Service must operate within the existing statutory framework if it is to fairly, consistently and effectively administer the Internal Revenue Code. [17] Please contact Christine Keller at (202) 622-2311 with any questions. MICHAEL J. ROACH FOOTNOTES /1/ We believe that further factual development is necessary to resolve each case. For example, it is not evident from the information that we have whether X held himself out as a nonbank trustee. In addition, we do not know whether the taxpayers signed any documents opening an IRA or took any other reasonably prudent steps to insure that the rollover was accomplished. The burden is on the taxpayer to prove what reasonable steps each took to accomplish the rollover. /2/ The Service published AOD CC-1988-010 on April 11, 1988 indicating non-acquiescence with Larotonda and stating that the [sic] under the rationale of In re Kochell, 804 F.2d 84 (7th Cir. 1986), the premature distribution tax applies to distributions regardless of whether they are voluntary. On January 29, 1999, the Service published AOD CC-1999-002, which withdraws the earlier Larotonda AOD due to statutory changes to section 72(t) brought about by the Restructuring and Reform Act of 1988, Pub. L. No. 105-206, 112 Stat. 685 (1998) that will be effective for distributions after December 31, 1999. However, the withdrawal does not alter the Service's position with respect to whether a voluntary/involuntary standard should apply. On January 29, 1999 in AOD 1999-003, the Service acquiesced in result only in response to Murillo v. Commissioner, T.C. Memo. 1998-13. The AOD specifically states that although the Service will not assess section 72(t) tax under the narrow circumstances of Murillo, in all other cases involving early distributions, the Service will continue to assess section 72(t) tax unless a statutory exception applies. END OF FOOTNOTES

Yes, the correct PLR ref is 8108044 November 26, 1980 *** M = *** N = *** Dear Sir: This is in reply to your letter requesting a ruling concerning a rollover of a lump-sum distribution from a qualified plan to an individual retirement account (IRA) after the 60 day time period for completing a rollover has passed. You state that you resigned from M in February of 1979. On April 14, 1980 you received a lump sum distribution of your interest in the M profit-sharing plan. On June 11, 1980 you mailed, to your broker, an application to establish an IRA with N. Your broker sent the application to N on June 24, 1980 and it was received by N on June 27, 1980. Based on the foregoing, you request a ruling whereby you would be able to rollover the funds distributed from the M profit-sharing plan to an IRA even though the 60 day period for a rollover, allowed by the Internal Revenue Code, has passed. Section 402(a)(5)© of the Code states that a participant in a qualified plan may roll over funds distributed from the qualified plan to an IRA if such transfer is made within 60 days of receipt of the lump sum distribution. It goes on further to state that a tax free rollover will not be allowed if any transfer of the distribution is made after the 60th day following the day on which the employee received the property distributed. In the instant case, there was no transfer of the funds distributed from the M profit-sharing plan within the 60 day period. Neither the Code nor the Internal Revenue Service Regulations allow for waiver or extension of the 60 day time limit. Accordingly, since the distribution was not transferred within the 60 day period allowed by Code section 402(a)(5)© you may not now rollover the funds distributed from M profit-sharing plan to an IRA. Sincerely yours, John J. Swieca Acting Chief, Employee Plans Technical Branch

I believe you are looking for PLR 8108044 [On April 14, 1980, an employee received a lump-sum distribution from a profit-sharing plan. The employee's broker mailed his application to establish an individual retirement account (IRA) several days after the 60-day rollover period under section 402(a)(5)© expired. Under these circumstances, the Service has held that the employee is not entitled to establish a rollover IRA with his lump-sum distribution.] In most of the other ruling, the IRS stated it didn't have the authority to extend the 60-day period. IMO, the IRS would not allow an extension for erroneous advice of this nature. It is not the same as receiving the funds within 60 days, but depositing it after the 60-day period. Here, the error was NOT "beyond the reasonable control of the taxpayer." Furthermore, the IRA disclosure statement provided the taxpayer contained the correct rules. If the erroneous advice was relied on, the compliance department might agree to a settlement (but not a rollover). One wayof looking at damages may be-- loss of the tax deferral on gain and payment of current taxes due on the distribution (and adjusted for the increse in basis I imagine).

No, not really, the integration rules are the same. However, the $40,000 limit is reduced under the participant exclusion rules of Code Section 402(h)(2)(B) when the plan is integrated AND the individual is an HCE.

The Revenue Procedure (2003-7) was eentually published as 2003-16. Note that it is effective on the date issued (1-27-03). IMO, it is unlikely that the IRS would grant a waiver in this case. Revenue Procedure 2003–16, 2003-4 IRB 359 (January 27, 2003) [summary: IRS provides guidance on applying to the IRS for a waiver of the 60-day roll-over requirement.] SECTION 1. PURPOSE This revenue procedure provides guidance on applying to the Internal Revenue Service for a waiver of the 60-day roll-over requirement contained in §§ 402©(3) and 408(d)(3) of the Internal Revenue Code. It also provides for an automatic waiver under certain circumstances. SECTION 2. BACKGROUND AND GENERAL INFORMATION .01 Section 401(a)(31) of the Code requires that a qualified trust provide for the direct transfer of eligible rollover distributions. A similar rule applies to § 403(a) annuity plans, § 403(B) tax-sheltered annuities and § 457 eligible governmental plans. (See §§ 403(a)(1), 403(B)(10) and 457(d)(1)©.) If a distributee fails to elect to have an eligible rollover distribution paid directly to an eligible retirement plan, section 3405© provides that the payor of a designated distribution that is an eligible rollover distribution must withhold from such distribution an amount equal to 20 percent of such distribution. .02 Sections 402©(3) and 408(d)(3) of the Code require generally that any amount distributed from a qualified trust or individual retirement plan must be transferred to an eligible retirement plan no later than the 60th day following the day of receipt in order to avoid inclusion in the distributee’s gross income. A similar rule applies to § 403(a) annuity plans, § 403(B) tax-sheltered annuities and § 457 eligible governmental plans. (See §§ 403(a)(4)(B), 403(B)(8)(B) and 457(e)(16)(B).) .03 Section 72(t) of the Code imposes an additional tax on a distribution from a qualified retirement plan equal to 10-percent of the amount of the distribution included in the distributee’s gross income, subject to certain exceptions. .04 Section 644 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Pub. L. 107–16, amended § 402©(3) of the Code and added new § 408(d)(3)(I) to permit the Secretary to waive the 60-day rollover requirement “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” The Conference Report to EGTRRA provides examples of situations that may justify waiver of the 60-day rollover requirement, such as during a period in which a distribution in the form of a check was not cashed, or for errors committed by a financial institution, or in cases of inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error. (H.R. Rep. No. 84, 107th Cong., 1st Sess. 252 (2001).) The amendments made by § 644 of EGTRRA apply to distributions after December 31, 2001. .05 Under §§ 7508 and 7508A of the Code, the time for making a rollover may be postponed in the event of service in a combat zone or in the case of a Presidentially declared disaster or a terroristic or military action. See Regulations § 301.7508–1 and Rev. Proc. 2002–71, 2002–46 I.R.B. 850. .06 Rev. Proc. 2003–4, 2003–1 I.R.B. 123 (January 6, 2003), provides the procedures for issuing letter rulings, information letters, etc., on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. .07 Rev. Proc. 2003–8, 2003–1 I.R.B. 236 (January 6, 2003), provides guidance for complying with the user-fee program as it pertains to requests for letter rulings, information letters, etc., on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division. SECTION 3. REQUIREMENTS FOR HARDSHIP EXCEPTION TO 60-DAY RULE .01 Application to the Service. Except as provided in Section 3.03 below, a taxpayer must apply for a hardship exception to the 60-day rollover requirement using the same procedure as that outlined in Rev. Proc. 2003–4 for letter rulings, accompanied by the user fee set forth in Rev. Proc. 2003–8. .02 Requirements for favorable ruling. The Service will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer. In determining whether to grant a waiver, the Service will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution, other than as described in Section 3.03 below; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred. .03 Automatic approval. No application to the Service is required if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60-day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60-day rollover period. Automatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover. .04 General rules. To be eligible for a waiver of the 60-day rollover period, either automatic or through application to the Service, the distribution must have occurred after December 31, 2001, and the rules regarding the amount of money or other property that can be rolled over into an eligible retirement plan within the 60-day rollover period (including § 402©(6) relating to sales of distributed property) apply to deposits made pursuant to a waiver of the 60-day rollover period (thus, if a taxpayer received $6,000 in cash from the taxpayer’s IRA, the most that could be deposited into an eligible retirement plan pursuant to a waiver of the 60-day rollover period is $6,000). Also, the rules for waiver of the 60-day rollover period in this revenue procedure apply to distributions from an individual retirement plan described in § 408(a) or (B), a plan qualified under § 401(a), a § 403(a) annuity plan, a § 403(B) tax-sheltered annuity and a § 457 eligible governmental plan. SECTION 4. EFFECTIVE DATE This revenue procedure is effective on January 27, 2003.

No. Must wait 2-years from the date the individual first participated in the SIMPLE-IRA. Note that the tax services (e.g., CCH) incorrectly reflected the Senate Committe Report. SBJPA followed the House bill and Sentate Amendment (i.e., SECS. 1421-1422 OF THE HOUSE BILL AND THE SENATE AMENDMENT), which reads (differently than the Senate Commitee Report), as follows (reproduced fully below): Current versions of SIMPLE-IRAs (model and prototype) do not turn into a traditional IRA after 2 years and cannot ever accept traditional IRA contributions. "To the extent an employee is no longer participating in a SIMPLE plan (e.g., the employee has terminated employment) and 2 years have expired since the employee first participated in the SIMPLE plan, the employee's SIMPLE account is treated as an IRA." (See [369] below.) (Note: the Senate Commitee Report did not have the "and ...2 -year rule." Unfortunately, that's not part of the law -- See Senate Amendment below.) From SBJPA -- B. INCREASED ACCESS TO RETIREMENT SAVINGS PLANS 1. ESTABLISH SIMPLE RETIREMENT PLANS FOR EMPLOYEES OF SMALL EMPLOYERS (SECS. 1421-1422 OF THE HOUSE BILL AND THE SENATE AMENDMENT) Present Law [360] Present law does not contain rules relating to SIMPLE retirement plans. However, present law does provide a number of ways in which individuals can save for retirement on a tax-favored basis. These include employer-sponsored retirement plans that meet the requirements of the Internal Revenue Code (a "qualified plan") and individual retirement arrangements ("IRAs"). Employees can earn significant retirement benefits under employer-sponsored retirement plans. However, in order to receive tax-favored treatment, such plans must comply with a variety of rules, including complex nondiscrimination and administrative rules (including top-heavy rules). Such plans are also subject to certain requirements under the labor law provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). [361] Contributions to an IRA can also be made by an employer at the election of an employee under a salary reduction simplified employee pension ("SARSEP"). Under SARSEPs, which are not qualified plans, employees can elect to have contributions made to the SARSEP or to receive the contributions in cash. The amount the employee elects to have contributed to the SARSEP is not currently includible in income. House Bill In general [362] The House bill creates a simplified retirement plan for small business called the savings incentive match plan for employees ("SIMPLE") retirement plan. SIMPLE plans can be adopted by employers who employ 100 or fewer employees on any day during the year and who do not maintain another employer-sponsored retirement plan. A SIMPLE plan can be either an IRA for each employee or part of a qualified cash or deferred arrangement ("401(k) plan"). If established in IRA form, a SIMPLE plan is not subject to the nondiscrimination rules generally applicable to qualified plans (including the top-heavy rules) and simplified reporting requirements apply. Within limits, contributions to a SIMPLE plan are not taxable until withdrawn. [363] A SIMPLE plan can also be adopted as part of a 401(k) plan. In that case, the plan does not have to satisfy the special nondiscrimination tests applicable to 401(k) plans and is not subject to the top-heavy rules. The other qualified plan rules continue to apply. SIMPLE retirement plans in IRA form In general [364] A SIMPLE retirement plan allows employees to make elective contributions to an IRA. Employee contributions have to be expressed as a percentage of the employee's compensation, and cannot exceed $6,000 per year. The $6,000 dollar limit is indexed for inflation in $500 increments. [365] Under the House bill, the employer is required to satisfy one of two contribution formulas. Under the matching contribution formula, the employer generally is required to match employee elective contributions on a dollar-for-dollar basis up to 3 percent of the employee's compensation. Under a special rule, the employer can elect a lower percentage matching contribution for all employees (but not less than 1 percent of each employee's compensation). A lower percentage cannot be elected for more than 2 out of any 5 years. [366] Alternatively, for any year, in lieu of making matching contributions, an employer may elect to make a 2 percent of compensation nonelective contribution on behalf of each eligible employee with at least $5,000 in compensation for such year. No contributions other than employee elective contributions and required employer matching contributions (or, alternatively, required employer nonelective contributions) can be made to a SIMPLE account. [367] Each employee of the employer who received at least $5,000 in compensation from the employer during any 2 prior years and who is reasonably expected to receive at least $5,000 in compensation during the year generally must be eligible to participate in the SIMPLE plan. Self employed individuals can participate in a SIMPLE plan. [368] All contributions to an employee's SIMPLE account have to be fully vested. Tax treatment of SIMPLE accounts contributions and distributions [369] Contributions to a SIMPLE account generally are deductible by the employer. In the case of matching contributions, the employer is allowed a deduction for a year only if the contributions are made by the due date (including extensions) for the employer's tax return. Contributions to a SIMPLE account are excludable from the employee's income. SIMPLE accounts, like IRAs, are not subject to tax. Distributions from a SIMPLE retirement account generally are taxed under the rules applicable to IRAs. Thus, they are includible in income when withdrawn. Tax-free rollovers can be made from one SIMPLE account to another. A SIMPLE account can be rolled over to an IRA on a tax-free basis after a two-year period has expired since the individual first participated in the SIMPLE plan. To the extent an employee is no longer participating in a SIMPLE plan (e.g., the employee has terminated employment) and 2 years have expired since the employee first participated in the SIMPLE plan, the employee's SIMPLE account is treated as an IRA. [370] Early withdrawals from a SIMPLE account generally are subject to the 10-percent early withdrawal tax applicable to IRAs. However, withdrawals of contributions during the 2-year period beginning on the date the employee first participated in the SIMPLE plan are subject to a 25-percent early withdrawal tax (rather than 10 percent). [371] Employer matching or nonelective contributions to a SIMPLE account are not treated as wages for employment purposes. Administrative requirements [372] Each eligible employee can elect, within the 30-day period before the beginning of any year (or the 30-day period before first becoming eligible to participate), to participate in the SIMPLE plan (i.e., to make elective deferrals), and to modify any previous elections regarding the amount of contributions. An employer is required to contribute employees' elective deferrals to the employee's SIMPLE account within 30 days after the end of the month to which the contributions relate. Employees must be allowed to terminate participation in the SIMPLE plan at any time during the year (i.e., to stop making contributions). The plan can provide that an employee who terminates participation cannot resume participation until the following year. A plan can permit (but is not required to permit) an individual to make other changes to his or her salary reduction contribution election during the year (e.g., reduce contributions). It is intended that an employer is permitted to designate a SIMPLE account trustee to which contributions on behalf of eligible employees are made. Definitions [373] For purposes of the rules relating to SIMPLE plans, compensation means compensation required to be reported by the employer on Form W-2, plus any elective deferrals of the employee. In the case of a self-employed individual, compensation means net earning from self-employment. The term employer includes the employer and related employers. Related employers include trades or businesses under common control (whether incorporated or not), controlled groups of corporations, and affiliated service groups. In addition, the leased employee rules apply. SIMPLE 401(k) plans [374] In general, under the House bill, a cash or deferred arrangement (i.e., 401(k) plan), is deemed to satisfy the special nondiscrimination tests applicable to employee elective deferrals and employer matching contributions if the plan satisfies the contribution requirements applicable to SIMPLE plans. In addition, the plan is not subject to the top-heavy rules for any year for which this safe harbor is satisfied. The plan is subject to the other qualified plan rules. [375] The safe harbor is satisfied if for the year, the employer does not maintain another qualified plan and (1) employees' elective deferrals are limited to no more than $6,000, (2) the employer matches employees' elective deferrals up to 3 percent of compensation (or, alternatively, makes a 2 percent of compensation nonelective contribution on behalf of all eligible employees with at least $5,000 in compensation), and (3) no other contributions are made to the arrangement. Contributions under the safe harbor have to be 100 percent vested. The employer cannot reduce the matching percentage below 3 percent of compensation. Repeal of SARSEPs [376] Under the House bill, SARSEPs are repealed. Effective date [377] The provisions relating to SIMPLE plans are effective for years beginning after December 31, 1996. The repeal of SARSEPs applies to years beginning after December 31, 1996, unless the SARSEP was established before January 1, 1997. Consequently, an employer is not permitted to establish a SARSEP after December 31, 1996. SARSEPs established before January 1, 1997, can continue to receive contributions under present-law rules, and new employees of the employer hired after December 31, 1996, can participate in the SARSEP in accordance with such rules. Senate Amendment [378] The Senate amendment is the same as the House bill, except for the following modifications. [379] Under the Senate amendment, a SIMPLE plan can be adopted by employers who employed 100 employees or less with at least $5,000 in compensation for the preceding year. Employers who no longer qualify are given a 2-year grace period to continue to maintain the plan. [380] Under the Senate amendment, eligible employees are given 60 days before the beginning of any year (or the 60-day period before first becoming eligible to participate in the plan) to elect to participate in the SIMPLE plan. [381] For purposes of the 2 percent of compensation nonelective contribution formula, no more than $150,000 of compensation can be taken into account in any year with respect to any eligible employee. [382] The Senate amendment clarifies that an employer is permitted to designate a SIMPLE account trustee to which contributions on behalf of eligible employees are made. The Senate amendment also amends title I of ERISA to provide that only simplified reporting requirements apply to SIMPLE plans and so that the employer (and any other plan fiduciary) will not be subject to fiduciary liability resulting from the employee (or beneficiary) exercising control over the assets in the SIMPLE account. For this purpose, an employee (or beneficiary) is treated as exercising control over the assets in his or her account upon the earlier of (1) an affirmative election with respect to the initial investment of any contributions, (2) a rollover contribution (including a trustee-to- trustee transfer) to another SIMPLE account or IRA, or (3) one year after the SIMPLE account is established. END

Agreed. See Revenue Ruling 84-18.

Note: The reduction to the $40,000 limit in an integrated SEP is equal to the spread percentage times the participant's compensation not in excess of the TWB. For 2002, the maximum offset produces a limit of $35,160.70 ($40,000 - ($84,900 x 5.7%)) ($36,160.70 with catch-up). See following chart for examples of maximum limits for 2002. Plan................Perc...........................................Reduced Integ...............of....................... Max................$40,000 Level...............TWB....................Spread............Limit $84,900..........100%..................5.7%...............$35,160.70 $67,921...........80% + $1............5.4.................$36,128.50 $30,000...........35.3356891%.......4.3.................$38,290.00 $16,980...........20%....................5.7................$39,032.14 * Catch-up contributions may be made in addition to the $40,000 or $40,00 (as reduced) limit. [iRC 414(v)(3)(A)] The maximum spread is 5.7 percent when the integration level is equal to the TWB or is set at 20 percent of TWB or less. The maximum 5.7 percent spread is reduced to 5.4 percent when the integration level is less than the TWB and more than 80 percent of the TWB. If the integration level is set at more than 20 percent of the TWB, but does not exceed 80 percent of the TWB, the maximum spread is 4.3 percent. [iRC 402(h)((2)(B)] QP-SEP Illustrator always uses the maximum spread. Prior to 2002, a contribution based on the prior 15 percent participant exclusion limit was always less than the reduced limit.

Agreed that the deduction limit is probably not an issue. If either plan is top-heavy, then both are top heavy. What does the SEP read? Will T/H contributions be made to it or some other plan? If it does not state, then make the T-H contribution to the SEP. If there is a participant in the QP that isn't in the SEP then they too must get a T-H contribution (into the QP). Contributions to the P/S can be fully integrated if the SEP is not integrated. It is not necessary to give more than one T-H contribution to any participant. I think (hope) this fully answers your Qs.

Neither plan is any good. The SEP is discriminatory; and the maximum allowable contribution percentage, as corrected under proposed regulations is 0 percent. The SIMPLE (now a "Complex") is not valid (it failed to cover all employees and because there were contributions to another plan). I'm assuming there is no union exclusion applicable or other wierd facts. Nondeductible E/er contributions to both plans are subject to a 10 percent CUMMULATIVE non-deductible excise until corrected (i.e., amounts included on applicable Forms W-2). [Form 5330] The excess to SEP are subject to a CUMMULATIVE 6 percent nondeductible excise tax until corrected. [Form 5329] It does not appear that the 6 percent tax applies to a SIMPLE-IRA since it is ommited from Form 5329 (a SIMPLE IRA is not a traditional IRA). Code Section 4973 doesn't specifically mention it either. Arguably, excesses are to be reported in box 1 of Form W-2 (but not box 12). [see intructions on back of Form W-2.] Arguably, the amounts distributed will be taxable (again).

There are no fewer than eight separate limits that apply to a SEP/SARSEP. 1. The 25% deduction limit 2. The 25% exclusion limit 3. The $40,000 contribution limit (reduced if integrated SEP) 4. The 100% of compensation limit 5. The excess deferral limit ($11,000 for 2002, $12,000 for 2003) 6. The catch-up limit ($1,00 for 2002, $2,000 for 2003) 7. The excess contribution limit (or ADP = 125% if HCE) 8. The 50% rate participation test if SARSEP. SOFTWARE to crunch these numbers is available from: A. AQS Robert Garrels 303.465.4669 B. GSL Galactic Consulting Gary Lesser 317.254.0385 SEPs and SARSEPs have a unigue rule that limits the amount that can be allocated on an excluded basis to each participant. That limit is 25% of includible taxable compensation. Thus, e/er and employee contributions (assume $100,000 of pre-plan compensation) sd not exceed 25% of net compensation. So, if the e/ee elects to defer $2,000 as a pure elective, then the 25% limit is based on $98,000. Assume the individual was a HCE, and his 125% ADP limit is 1% or $1,000. Then the 25% amount would be based on $99,000 (or $24,750). If age 50 or over, then the excess wd be treated as a catch-up (up to $1,000 for 2002), thus the individual's excludable contribution limit is $25,750. If only elective contributions are made, then 20% of gross equals 25% of net. If e/ee, age 51, deferred the $12,000 maximum for 2002, then 25% of $89,000 ($100,000 - $11,000 subject to testing) plus $1,000 = $23,250. There is also a 100% limit, but with catch up contributions aside, the 25% limit will always be lower. There is a $40,000 limit (which is reduced if the plan is integrated) -- see note below. The employer's deduction limit is 25% of gross compensation, but it can not always be allocated on an excludable basis. All that being said, if the individual is self-employed, compensation means earned income. That's the pre-plan net profits which have been reduced for e/er contributions to non owners and then further reduced for 1/2 of the SE tax deduction, all contributions made for owner, and so on. Now for allocations and deduction purposes we can add back the pure elective and catch up (e.g., use $100,000). For exclusion purposes, however, the pure elective needs to be subtracted (e.g., use $89.000) for calculating the 25% participant exclusion limit. It is easier to work backwards in a SEP (i.e., contribute the amount that can be allocated and get a deduction for all of it. Note: The reduction to the $40,000 limit in an integrated SEP is equal to the spread percentage times the participant's compensation not in excess of the TWB. For 2002, the maximum offset produces a limit of $35,160.70 ($40,000 - ($84,900 x 5.7%)) ($36,160.70 with catch-up). See following chart for examples of maximum limits for 2002. Plan................Perc...........................................Reduced Integ...............of....................... Max................$40,000 Level...............TWB....................Spread............Limit $84,900..........100%..................5.7%...............$35,160.70 $67,921...........80% + $1............5.4.................$36,128.50 $30,000...........35.3356891%.......4.3.................$38,290.00 $16,980...........20%....................5.7................$39,032.14 * Catch-up contributions may be made in addition to the $40,000 or $40,00 (as reduced) limit. [iRC 414(v)(3)(A)] The maximum spread is 5.7 percent when the integration level is equal to the TWB or is set at 20 percent of TWB or less. The maximum 5.7 percent spread is reduced to 5.4 percent when the integration level is less than the TWB and more than 80 percent of the TWB. If the integration level is set at more than 20 percent of the TWB, but does not exceed 80 percent of the TWB, the maximum spread is 4.3 percent. [iRC 402(h)((2)(B)] QP-SEP Illustrator always uses the maximum spread. Prior to 2002, a contribution based on the prior 15 percent participant exclusion limit was always less than the reduced limit.

Prototype Roth IRA Transitional Relief. An individual and a sponsoring financial organization that establish a prototype Roth IRA after 2001 using a document that has not received an EGTRRA opinion letter will be deemed to have established an EGTRRA-approved document if all of the following conditions are satisfied: 1. The individual and the sponsoring financial organization used a document provided by a prototype sponsor to sponsor the Roth IRA. 2. The prototype sponsor applies to the IRS for an opinion letter no later than December 31, 2002. 3. The individual and the sponsoring financial organization adopt the approved document within 180 days after the date the IRS issues a favorable opinion letter. 4. The individual and the sponsoring financial organization comply in operation at all times with applicable statutory requirements. [Rev Proc 2002-10, §_5.01, 2002-4 IRB 1]

If you want the lower paid to get 25% you must contribute 25%. If you're allocating a dollar amount, that's 25% of compensation up to $160,000. If any more is contributed, the excess amount is not deductible. If you must specify a percentage allocation, then use 25 percent. If you contribute 20% of total (up to $200,000) compensation, everyone will be allocated more than 20, at least one will hit the $40,000 limit. Remember, too, that the 415 limit is 100% of compensation up to $40,000 limit. $41,000 if catch-up for 2002.

The 2-year period begins on the date the individual first participated in the SIMPLE IRA of the employer; that is, the date the first contribution was made into the SIMPLE-IRA account or annuity.

Yes. The 25% contribution is merely capped for the HCE at $40,000 (assuming the plan is not integrated with social security).

By contributing to a SEP for 2002, you will effectively eliminate the SIMPLE plan (which generally can not co-exist with a SEP). The SIMPLE contributions are not deducted if self-employed (reflected included as "wages" on W-2 if not SE). Amounts contributed to SIMPLE-IRAs are then corrected as excess (which will take into account the loss). You may be eligible for an deduction for the loss if you itemize (subject to 2% floor) and you fully distribute all SIMPLE-IRA amounts from all SIMPLE-IRAs and recieve back less than the nondectible contributions (i.e., the excesses that were taxed) made to the account.

Arguably, you could have had a 25% SEP (based on net earned income) and make elective contributions to a qualified 401(k) plan (based on your earned income) and on the W-2 compensation of non-owner employees.

The 2-year period begin on the date the individual first participated in the SIMPLE IRA of the employer. After that period has expired, the amount may be rolled over into another SIMPLE IRA, QP, 403(B) plan or eligible gov't Code Section 457 plan that specifically allows for rollovers from a "SIMPLE-IRA" (which is not, even after two-years, a "traditional" IRA). Here, the two year period can't expire until 2003 (assuming contributions were made in 2001).

Although the family aggregation rules were repealed by the Small Business Job Protection Act of 1996 (SBJPA). The definition of 5 percent owner as amended, however, requires family attribution under Code Section 318. (The definition of a 5 percent owner in Code Section 414(q)(2) refers to Code Section 416(i)(1), which in turn refers to the attribution rules of Code Section 318.)

Several possibilities exist that deal with the resulting excess contributions, some of which offer solutions: 1. The plan becomes a traditional 401(k) plan and is taken out of the realm of a SIMPLE 401(k). 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. [Rev Proc 2002-47]. 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 as a clear mistake 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)©, 4972©(2)] In May 1999 the IRS informally agreed with propositions 2 and 4 above. [General Information Letter issued to Gary S. Lesser, May 18, 1999; see also Rev Rul 91-4, 1991-1 CB 57.] Practice Pointer. Practitioners should proceed with caution when dealing with excess contributions to a 401(k) SIMPLE plan until further guidance is provided by the IRS.

Yes, integration is permitted in a SEP [iRC 408(k)(3)(D)]. Oftentimes, non-model SEPs have provisions to allow for integration. NOTE HOWEVER, that the amount that can be allocated to a HC employee, on an exluded basis (generally $40,000), is reduced if the plan is inegrated. [iRC 402(h)(2)(B)] E.g. If fully integrated at $10,000/5.7%, the $40,000 limit is reduced to $39,430 if a HCE. E.g. If fully integrated at $84,900/5.7%, the $40,000 limit is reduced to $35,160.70 ($40,000 - (.057 x $84,900)). SEP documents do not contain provisions relating to the exclusion of SEP contributions by participants. They are found in Section 402(h) of the IRC. The catch-up amount, if any, can then be contributed in addition to the $40,000 (or reduced $40,000 limit). [iRC 414(v)] In designing an integrated SEP it is easier to work backwards (using allocations) rather than allocating deductible amounts, especially if self-employed individuals are participants. This is because, the maximum deductible SEP amount can not always be allocated on an excluded basis to participants. [iRC 402(h) and 404(h)]

Deductible contributions to a SEP/SARSEP merely eat up the otherwise available deductible P/S limit (see IRC 402(h)). The P/S plan can cover only those employees that are eligible under its terms. If no SEP/SARSEP contributions have been made for the year, then the SEP/SARSEP does not require a top-heavy contribution. Even if it did, a SEP/SARSEP may provide that any required top-heavy contribution be made to some other plan. Also, if less than 50% of eligible employees elect to defer, then the plan is not a SARSEP for that year. In general, the P/S can be fully integrated, assuming integrated contributions are not made to the SEP.

The only contributions that may be made into a SIMPLE IRA are those made under a qualified salary reduction arrangement and transfers/rollovers from another SIMPLE-IRA. [iRC Sec 408(p)(1)(B)]