Gary Lesser

There are no rules, regulations, or guidance under Code Section 414(a) to define the terms successor employer and predecessor employer. The IRS has stated verbally that when there has been a more than 50 percent change in ownership of the employer, a new employer exists. [see too, IRC 3121(a)(1), 3306(b), 4980, and IT Reg Sec 31.3302(e)-1 relating to successor employer for FUTA tax, and see IT Reg § 1.415(f)-1(a) defining predecessor for 415 purposes] For purposes of continuing a SARSEP, it would be risky (imo) to adopt the SARSEP plan of the former employer without first obtaining a private letter ruling. Conversely, if there has been a 50 percent or less change in ownership, the relationship of successor employer and predecessor employer may exist. If a successor employer continues a plan for another employer (predecessor employer), all employees who worked for the predecessor employer must be given credit for the years of service for that predecessor employer. [i.R.C. § 414(a)(1); Ltr. Rul. 9336046; see also Ltr. Rul. 9853048 treating a new corporation as a successor employer for FICA and FUTA purposes]

The model SEP (Form 5305-SEP) was last amended in December 2004. The model SARSEP (Form 5305A-SEP) was last amended in June 2006, but did not require readoption if the March 2002 version of the form was used. FWIW, there is no harm in keeping a discontinued SEP current. Hope this helps.

In the case of a 401(k) plan, no sooner that the accountant can determine earned income, BUT NO LATER than the DOL requires. The deduction for SIMPLE contributions require that amounts be contributed sooner (as you say).

JIM, SEE RECENT POST AT http://benefitslink.com/boards/index.php?/topic/54339-getting-rid-of-a-simple-due-to-adoption-of-another-plan/

The adoption of the second plan will likely violate the exclusive plan requirement causing all contributions under the SIMPLE IRA plan for the plan year to be treated as excess contributions. Unfortunately, the IRS has not issued formal guidance on excess contributions to a SIMPLE IRA. Form 5329 does not provide for such excesses to be reported on that form (nor does Form 5330 apply) because a SIMPLE IRA is not a traditional IRA, although it is an IRA (just like a SEP or a SARSEP). Therefore, many financial organizations will not make a corrective distribution from a SIMPLE IRA. Instead, they consider any withdrawal an age-based distribution taxable when withdrawn and subject to the 25 percent penalty tax (unless an exception applies). That being said, an amount contributed on behalf of an employee that is in excess of an employee’s benefit under the plan (or an elective deferral in excess of the annual dollar amount, including catch-up contribution, under Code Section 402(g) is treated as an “excess amount” under the IRS’s plan correction program. Under the EPCRS, the employer may be able to effectuate a return of the contributions (or possible pay a 10% fee and keep the assets in the SIMPLE-IRAs). And special 1099-R reporting rules apply. I would also request waiver any excise taxes that might apply (e.g., the 10% tax on nondeductible contributionms). Since Service approval is needed to waive excise taxes that would otherwise apply the accountant may want to wait until the following year before implementing a 401(k). That being said, for several thousand dollars (say $5-7k), the 401(k) plan could exist (instead). The recharacterization of amounts in the SIMPLE-IRAs to a 401(k) trust may be a prohibited transaction and likely result in additional complications too nasty to even mention. I see no method of correction other than the EPCRS (service approval would be extremely prudent) and provide the trustee/custodian with any authorization it feels is needed to code the distributions as other than taxable and subject to the 25% early distribution penalty. Hope this helps. [see chapters 16 and 17 of the SIMPLE, SEP, and SARSEP Answer Book.]

The IRA-to-IRA rollover rules do not preclude the use of the withdrawn funds by the IRA account owner. That being said, a valid rollover should not be considered a prohibited transaction under the IRC so as to invalidate the account's exemption. What if a different IRA was used to receive the repayment amount? In both the matters you mentioned the IRA owner engaged in a clear violation of Code Section 4975 and the disqualification of the account was warrented. Here a distribution was made, it is not a loan as there is no obligation to repay. I do not see a PT under the IRC based on the facts you mentioned. OTOH, the transfer of funds to the IRA shortly before the filing of the bankruptcy petition, is arguably a transaction that is treated as fraudulent as to creditors in a bankruptcy proceeding and BUT does not cause the account to lose its exemption under the IRC. Thus, I can not see the bankruptcy court having any claim beyond the amount that was repaid to the IRA shortly before the bankruptcy petition was filed. The new IRA exemption amount (eff 4/1/2013)is $1,245,475 (78 Fed Reg 12089, 12090). Hopes this helps.

Do you have ALL plan documents going back to inception of plan? The plan was likely amended in 2002. Thus, the plan in existance prior to 2002 may have been an integrated prototype. That being said, you do have a bunch of problems. In addition to a bunch of over and under contributions, there are all sorts of penlties that have to be addressed. I would not suggest VCP to fix this plan; in addition, the problems could be considered egregious if not handles skillfully. The plan can be amended for 2013 (to be integrated), but not retroactively. I would also suggest an ERISA attorney that has also handled SEPs as they have some unique properties and a very unforgiving (a bunch of 6% cummulative and 10% penalties). Hope this helps some.

There is very little to no guidance on point that absolutely applies to a SEP, but see the "shall not discriminate in favor of the HCE" provisions under 408(k)(3). Assuming the individal commenced employment in 2009, selecting service in more than two prior years could be considered discriminatory. Now, had the plan contined a two-year service rerquirement to begin with (possible to likely), amending it to three years (to exclude the newly hired employees) could also be considered discriminatory if there are any HCEs that could not meet the new eligibility requirementsa at the time the plan was established (a borrowed and related QP rule). Missing documents aside, a private letter ruling should be sought if extending the eligibility time period beyond the time a HCE was first eligible to participate. I am not aware of this question every being addressed in a PLR (or anywhere else, other than in my Answere Books), Any new SEP has to be treated as a continuation of the old SEP (whether it be called an amendment or restatement, or nothing at all). So, selecting three years, again may be problematical, especially for the employees hired in 2011 since there is no document. Client might consider using "0" requirement for current employees and using two or, if employment commenced in 2008, three years starting in 2013. Hope this helps answer all of your inquiries.

Purely s a technical matter <<grin>>, contributions should be allocated to ALL eligible employees at the time each contribution is made (in accordaance with plan provisios). In other words, contributions should not be made for owners in January of this year and on April 14 of the following year for rank-and-file employees. I agree with Bird on plan choice. Perhaps A SIMPLE IRA would be adequate, depending on desired contribution levels

rfahey, you state "the RMD on this annuity would be calculated like any other `account.'" IT IS NOT an "account," the POINT I WAS TRYING TO MAKE (but not really any longer). In most respects the RMD rules are identical for IR-annuities and IR-accounts , but in calculating the actual annual dollar amount the rules differ (are "similar"). Each contract provides for an rmd amount based on its own internal factors and assumptions (determined under different rules - see below). Perhaps the IR-Annuity is not subject to the RMD rules [blasphemy]! To be an IR-Annuity under Code Sectioin 408, the contract issued by the insurance company provides for the distribution of a minimum amount to comply with the RMD rules that apply to annity contracts that is an individual retiremen arrangement. If it were an IR-Annuity under CODE SECTION 408(b) it would have been in pay staus (annuitized). The fact that it isn't and the individual is age 90 is perplexing. However, there may be a reason (see later). Pub 590 states: "Distributions from individual retirement account. If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year. See Figuring the Owner's Required Minimum Distribution, later. "Distributions from individual retirement annuities. If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries, IRS offices, and online at IRS.gov." (But see below.) Now, that section, Treasury Regulations Section 1.401(a)(9)-6, Required Minimum Distributions for Defined Benefit Plans and Annuity Contracts is not (always) the same as the rules regarding IRA "accounts" found in 1.408-2(b)(6) that apply to "Individual Retirement Accounts" where getting your rmd may be optional. That section refers to section 1.401(a)(9)-5 were the annuity has not yet been annuitized. In that case the regular Pub 590 "individual account" rules apply and Mike is spot on. The holding of an IR-Annuity (that is a 408(b) IRA) is rarely held in a brokerage account and is generally done by accident. Is it possible that the contract was issued prior to ERISA in 1974? In those days (and for a short period thereafter), insurance companies sold an after-tax product called an "Individual Retirement Annuity," some even were called "qualified." HOWEVER, they were not the same as Individual Retirement Annuities under Code Section 408(b). A friend mentioned another possible reason, the annuity contract is a single premium deferred annuity generally treated like a CD account for RMD purposes. I suspect yours does say "IRA" all over it. Because this annuity has not been placed in pay status and the individual is age 90, I believe this is a either a PRE-ERISA annuity contract (or one that was sold shortly after) - and no RMD rules appply to it. If so, it may be unwise to offset required distributions amounts from the IRAs under Code Sectio 408(a). I do not think I can be of further assistance. Hope this helps.

Assume no payments were requested (it's still accumulating). How much would have been required to be distributed under the contract? Since the individual is age 90, the 5-year (20%) payout schedule would appear to be more than the RMD amount and satisfy any contract rules regarding RMDs. However, this does not help answer the Q.

Then it would have had provisions regarding RMD amounts. How much would be required (the minimum) to be distributed under the fixed annuity contract (by its own terms), that is, without the owner having to look at any table or chart and assuming no payments had been requested.

No, but even though all employees must receive the same (uniform) rate of contribution (integration aside); a rate of contribution that decreases as compensation increases is considered uniform. [i.R.C.§§401(l), 408(k)(3)(D)] An individually designed plan would be needed. Consider too, if old enough, the HCE could remove contributions the next day without penalty. Hope this helps. Perhaps the HCE could join a union and be excluded under the document from participating.

Even though the fixed annuity does have value in an "account" or "sub account" before annuitization), the rules to be followed in calculating RMD amounts are different because it is (for purpses of our discussion) an IR-Annuity (rather than held say in an IR-Account with a trust/custodial account). So I ask, if no one did anything, how much would be required (the minimum) to be distributed this year from the fixed annuity contract (by its own terms), that is, without the owner having to look at any table or chart? IOW, what would the insurance company automatically send a check for (to comply with rmd rules)? I believe the answer to that Q will answer the Q in this thread. Once the amount is known we should have an answer. If there is no amountr required, then it wasn't an IR-Annuity.

rafahey, could you indicate whether the contract issued by the insurance company is a stand alone IRA (IR-Annuity) or merely an investment (perhaps one of many that could be) held in an account? I suspect the "fixed annuity" is merely an investment in an IR-Account. Is the fixed annuity held by a trustee or custodian?

Assume that the divisor for an an IR-Account RMD is 4, next year it is 3. There is $200,000 remaining in the account (12/31 FMV), so we distribute $50,000. Now, in addition, lets assume, that an IR annuity was purchased some time ago. It calls for say a lifetime distribution of $44,000 under its RMD provision (based on its unique annuity factors used by insurance company). It has no real account value, but an interpolated terminal reserve (ITR) of $85,000. Now, the individual arranges to have $50,000 distributed from this IR-Annuity for next 4 years. What I am saying is that the IR-Account distribution can be reduced by just $6,000 ($50,000 - $44,000) and still meet RMD rules. The IR-Account will ceased distributions at age 110 (distribution factor is 1), whereas the IR-Annuity could make payments for life (say age 120) without violating the RMD rules. Only if the annuity contract were purchased in an IR-Account as an investment, would the contracts FMV (ITR) be used for purposes of calculating the RMD. Since we arrive at different numbers to satisfy the RMD rules, one of us is wrong! The offset, imo, is the amount by which the amount distributed ($50,000) exceeds the RMD required under the IR-Annuity contract (unknown, as determined by insurance company).

RMD amounts distributed under IR-Annuities are rarely the same as the amount determined for IR-Accounts. It makes no difference that the annuity contract is annuitized or accumulating. The "special rules" allow annuity contracts to use anuity factors based on 401(a)(9). IR-Annuities also have rights and features that aren't taken into account under the IR-Account rules. The RMD amount has to be determined separately for each IRA (i think here we agree). See 1.408-8, Q&A 9. Since the RMD amounts for the annuity are calculated differently (under the contract), the offset procedure above, imo still does not work. If an annuity (any type) is purchased in an IR-Account as an investment, then the offset (at it's face value) is okay. As an IR-Annuity (if that is what it is), the contract has a RMD amount that is required under it's terms (it does not have to be calculated by the account holder).

Not so fast. Aren't IR-Annuities and IR-Accounts treated differently for RMD purposes? Here, it appears that there are three individual retirement arrangements (IRAs) that are accounts and one IRA that is an annuity If the IRA is an IR-Annuity (IRC 408(b)) and the other IRAs are IR-Accounts (IRC 408(a)), I believe the IR-annuity has to be looked at separately, and only the excess determined under that contract used to offset RMD amounts from the other three IRAs that are IR-Accounts. See Pub 590, Distributions from individual retirement annuities (p 32), referring to the "special rules" Treas. Reg. Section 1.401(a)(9). For an IRA that is an IR-annuity "[R]ules similar" to the 401(a)(9) RMD rules are used (see IRC 408(b)(3)). IOW, the value of all four IRAs would not be combined for RMD purposes. Had an annuity (qualified or non qualified) contract been purchased in an IRA that is an account, then (imo) its 12/31 value must be used instead (fmv of all four IRAs combined for RMD purposes).

Probably not. The Preamble to the 401(a)(9) regulations state: "Calculation Simplification "An employee's account balance for the valuation calendar year that is also the employee's first distribution calendar year is no longer reduced for a distribution on April 1 to satisfy the minimum distribution requirement for the first distribution calendar year. Contributions made after the calendar year that are allocated as of a date in the prior calendar year are no longer required to be added back. The only exceptions are rollover amounts, and recharacterized conversion contributions, that are not in any account on December 31 of a year. These changes are made to the qualified plan rules as well as IRA rules to maintain the parity between the rules." From the 1.401(a)(9)-5 regulations Q&A-3--- Q-3. What is the amount of the account of an employee used for determining the employee's required minimum distribution in the case of an individual account? A-3. (a) In the case of an individual account, the benefit used in determining the required minimum distribution for a distribution calendar year is the account balance as of the last valuation date in the calendar year immediately preceding that distribution calendar year (valuation calendar year) adjusted in accordance with paragraphs (b) and © of this A-3. (b) The account balance is increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date. For this purpose, contributions that are allocated to the account balance as of dates in the valuation calendar year after the valuation date, but that are not actually made during the valuation calendar year, are permitted to be excluded. © The account balance is decreased by distributions made in the valuation calendar year after the valuation date. (d) If an amount is distributed by one plan and rolled over to another plan (receiving plan), A-2 of §1.401(a)(9)-7 provides additional rules for determining the benefit and required minimum distribution under the receiving plan. If an amount is transferred from one plan (transferor plan) to another plan (transferee plan), A- 3 and A-4 of §1.401(a)(9)-7 provide additional rules for determining the amount of the required minimum distribution and the benefit under both the transferor and transferee plans.

No. For deduction limits (IRC 404) treat the SEP contribution as though it was a profit-sharing plan.

Just a follow up.-- For a QP, the $250,000 limit under 401(a)(17) is prorated. [see http://www.mhco.com/library/Articles/2007/...ear_020907.html] That section does not apply to SEPs. The SEP compensation $200K+ limit is governed by IRC 408(k)(3)©. However, the 415 limit is prorated if the limitation year is changed to less than 12 months. If that occurrs, then 100% of gross compensation for short plan year and $50K limit for 2012 limit on number of months in short plan year, becomes the limit. SEPS are subject to Code Section 415. The limitation year is the calendar year unless another 12-month period is designated in the plan document. (Nearly every plan will designate the plan year as its limitation year.) So, if a CY SEP plan were made effective on January 1, not terminatred, or LY ameded, there would be no change to the limitation year under Code Section 415. [see I.T. Reg. Section 1.415(j)-1] It speaks about terminating a plan before the end of the year, but not about starting it in November for a new employer. See, too, the IRM at http://www.irs.gov/irm/part4/irm_04-072-007.html (portion below) Internal Revenue Manual [4.72.7.3.2.2 (06-14-2002)] Short Limitation Year ... "(4) The short limitation period requirements apply only to changes in the limitation year.--For a new participant, the dollar and percentage of compensation limitations in effect for their first limitation year, even if participation commences during the year, is always an entire year's dollar limitation and the applicable percentage of an entire limitation year's compensation, including compensation prior to participation (similarly for those who cease participation during a limitation year or for plans that begin or terminate during a limitation year). " Thus, it would appear that 415 compensation would not have to be prorated unless the limitation year were to be changed (i.e., be less than a 12 calendar month period). A change could occur by plan design, amendment, or termination. See, too, Section 7 of the SEP LRM The plan will generally define compensation on an annual bases, e.g., as W-2 compensation. If the compensation for any limitation year is less than 12 months, then proration is required. Hope this helps. Please contribute your thoughts.

[Hi J! ] Absolutely no. The registration/title should show the Trustee/Custodian's name and the beneficiary/owner's (fbo) name. In most cases, the account type is added to the registration or otherwise shown on the statement. In some cases, the plan name is also reflected on the statement. E.g., XYZ Bank, Trustee, FBO {owner}, SEP-IRA. I am not aware of any institution that includes the plan (or employer's) name before the "SEP IRA" in the registration. The account can not be titled/registered in the name of the employer fbo an employee. The assets must be held in the name of a bank/insurance company or other IRS approved institution.

Agreed. SEP service must be as an "employee" (regadless of whether any compensation is paid) under Code Section 408(k).

Interesting facts. If the corporation has any other employees that would be eligible, THEN there would be a problem.

The 1.5% calculation described in the Streamlined Prcedures (App. F, Sch 4) is correct. A SIMPLE does not have any ADP-type limits.