Gary Lesser

The contributions to the Simple-IRA sd be reported on Form W-2 for 2002. The employee should remove the excess from the Simple-IRA on or before the due date of his or her return following rules similar to IRA excesses. It is helpful if the employer communicates this all to the employee in writing so the employee can use it in connection with the request for making a timely corrective distribution and have it coded correctly as an "excess" contribution (i.e., not subject to penalty).

Furthermore, IRS guidance precludes adoption after the October 1 deadline except in the case of a new employer. [Notice 98-4, Q&A K-1] The legistlative history indicates that the deadline is to prevent overlapping election periods and to prevent possible abuses. [s Report No 104-281, at 66 (1996); see SPJPA Sec 1421(a); see too, [i]Simple, SEP and SARSEP Answer Book [/i](8th Ed) Q 14:17]

... and the qualified plan must also allow for such rollovers and specifically state that the plan types that it accepts rollovers from; in this case, a "traditional IRA". Note, too, that unlike a SEP or SARSEP IRA, a SIMPLE IRA is not treated as a "traditional IRA" and must be separately stated for this purpose.

Do note that elective contributions for the current year may not be rolled over prior to the date a notice is provided to the employees that the ADP test has been satisfied or March 15 of the following year.

Please post additional information, facts, and the IRS's suggested correction for consideration and reply.

The termination is an amendment and notice must be given. Generally, the amendment can not be made effective prior to the first day of the following plan year. See Rev Proc 97-9.

The amendment if made before the contribution is made is allowable. However, there is an unsettled issue if "prohibited group members" could not have met the new eligibility requirement at the time the plan was originally adopted. The IRS has never issued any guidance with respect to rolling eligibility under a SEP.

The $40,000 limit under a SEP is reduced for HCEs if the plan is integrated. There is also a 25% limit on allocations based on taxable compensation (gross compensation reduced by non-catch-up elective). Otherwise the amounts deductible under the SEP eat away at the allowable P/S limit under Code Section 404(h). Other institutions have prototype documents that allow a SEP in combination with 401(k) plan.

There may be a problem if the amendment is effective prior to the first day of the following year (see Rev Proc 97-9). In the absence of well-established guidance, the position of the IRS regarding excess contributions to a SIMPLE 401(k) plan is, at best, unclear. Several possibilities exist, 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. 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.

You said they were making integrated contributions. But now we are only talking about T-H contributions??? I'm generally confused, but here goes. If the SASEP doesn't get its T-H contribution (using compensation for the full year (and for the 125% rate), and assuming the document doesn't provide that any require T-H contribution is to be made into a different plan (which is generally an option)), but is otherwise okay, then it becomes a bad SARSEP and all contributions sd be shown on W-2. How to treat the elective amounts for ADP/402(g) in the QP is beyond my expertise. Arguably they have been "returned" when shown on the Form W-2. What do the drafters of the qualified plan say about this (what does the QP plan say?)? If the T-H contribution is made to the SEP/SARSEP, then one has to look at the qualified plan to see if it can be avoided there. Are all affected employees getting the required contribution. I assume that you have the same coverage in both plans as both may be top-heavy. If integrated contributions are made to both plans then there may be a discrimination issues as well. This should ALL be resolved with a Qualified Plan consultant Whether it is best to collapse the SARSEP (by failure to mke the T-H contibution, etc) or something else sd be coordinated with the administrator of the QP.

The first LRM was issued Jan 1998 (but wasn't posted anywhere until later that year). Since the notice for the "current year" specified the eligibility requirements, any change for the "current year" would have been inconsistant with that notice. So, no amendment for the "current year." If the notice contained more restrictive requirements, then the plan could have been amended to conform to that notice. Since your facts didn't state anything to the contrary, I assumed that the notice conformed to the plan. Consider this a better answer. The issue of "rolling eligibility" may still exist.

The prhibition against life insurance in an IRA can be found in Code Section 408(a)(3).

The IRS has never addressed this issue. However, if the SARSEP as not terminated it sd be okay. However, to avoid numerous problems, the amendment should be effective the following year. That being said, however, employees must be given notification of any amendment to the SEP or risk subjecting the plan to full ERISA reporting requirments. [see DOL Reg Section 2520.104-49]

I agree with ActuarySmith. Amending a SIMPLE 401(k) mid-year (e.g. to a traditional 401(k) for the current year), however, would be problematical.

For SIMPLE-IRA plans you might also wish to consider SIMPLE Illustrator. Contact Gary Lesser at 317-254-0385.

The SIMPLE-IRA eligibility requirements for the current year can be amended. However, any amendment can become effective only at the beginning of a CY and MUST conform to the content of the plan notice for the CY. See LRM#18 (Simple, SEP, and SARSEP Answer Book, 8th Ed, page L-24). If amending for a future year, there is an unresolved issue relating to "rolling eligibility" that has never been addressed. In a QP, discrimination could result if HCEs could not have met the eligibility requirements at the time the plan was originally effective. That being said, in other cases, there shd be no problem in the case of a SIMPLE.

For starters, assuming the SARSEP is otherwise okay, the employer contributions reduce the otherwise applicable P/S limit and the elective contributions have to be tested under each plan separately. The elective are in a sense aggregated and may not exceed the 402(g) and catch-up limit. Compensation for the full year is generally used in these situations. If the SARSEP is bad (not available for year, fail to make T-H contribution to plan designated in the SEP) then it can be ignored if all SEP and SARSEP contributions shown on Form W-2 for 2002.

It always applies regardless of the destination (except to another SIMPLE IRA).

Agreed (assuming the tax return due date had passed). Amended returns all the way around. The employer is also subject to the 10 percent tax on nondeductiible contributions under Code Section 4972 for 2001. The employees may also be subject to the 6 tax on excess contributions under Code Section 4973 for 2001 (unless they were corrected timely) -- however, a good argument can be made that the 6 percent tax doesn't apply to a SIMPLE-IRA (since it isn't enumerated in Code Section 4973 and the Form 5330 doesn't provide for it). The excess amounts if reflected on the 2001 Form W-2 will avoid the 10 percent penalty tax next year (2002). There also may be state-law considerations.

As far as I am aware of, contributions may not be made after a qualified plan is terminated (although distributions may be made from a terminated plan). You might wish to ask this Q on one of the other message boards. The original Q was headed SIMPLE 401(k) Plan. If a SIMPLE IRA, I have no problem with contributions being made into the SIMPLE-IRAs after year end; the SIMPLE IRAs are not terminated merely because the employer discontinues the SIMPLE IRA PLAN effective as of the first day of the following year. Keep in mind the SIMPLE IRA plan is adopted by the employer. The SIMPLE-IRAs are adopted by the employees; the employer can not terminate the SIMPLE IRAs.

After 2001, a SEP-IRA can be transferred into the qualified 401(k)plan trust (but not into the SIMPLE-IRA component of such plan). The plan/trust must specifically state that assets from a "traditional IRA" (which a SEP is) may be rolled over into it. While a QP does not have to accept rollover, it must state specifically from what types of plans/arrangements it will accept rollovers from. Thus, conduit IRAs are still advisable to maintain the greatest degree of flexibility.

A fee to transfer the account would not be an annual administrative fee and would be prohibited. See Notice 98-4, Q&A J-4, Examples 1 & 2.

Agreed. Assuming $5,000 is required in only _one_ prior year (up to 2 could be selected) and reasonable expected to earn $5,000 (as stated in document) for current year, they would enter on 1/1/03.

Unless they are in a 100% money purchase pension plan the leased employees would have to be included. A prototype SEP (not model SEP) document would have to be used.

After the two year rule is satisfied, Yes. It may even be converted to a Roth after such time.