Gary Lesser

The SIMPLE 401(k) is a qualified plan (so far). therefore the Revenue Procedure applies to it. SIMPLE IRAs are not covered by the Revenue Procedure.

Not if it is a SIMPLE IRA. However, it is possible that an IRS district office would use the general delegation order dealing with closing agreements, D.O. 97. If a Simple 401(k), then a bad allocation could possibly be corrected under EPCRS (likely), or as a "mistake of fact" (although not expressly stated to be one (not likely)), or if contributions are conditioned upon deductibility and the contributions are subsequently denied (likely).

Since the firm started in 2000, and the first contributions are for 2002, why not use a 2 year service requirement and Joe will participate in 2003 (rather than in 2002 with a 1 yr requirement). The owner, who performed service in 2000 and 2001, will participate in 2002 (with a 2 yr requirment).

Since the businesses are not controlled/related/affilliated (??) and he does not own more than 50% he can have a SEP and make the full contribution (but if SARSEP, total elective contributions can not exceed the 402(g) limit). When computing the individuals earned income, the W-2 income has to be taken into account in computing the 1/2 of the IRC 164 deduction. Thus, his EI will be a little higher with W-2 income (his offset will be lower). If you want it computed, provide the pre-plan EI and how much W-2 income was earned. Can I assume no other employees?

Please clarify your question. Was the firm started in 1999 or 2000? The owner must meet whatever service requirement is specified; it can not be later changed unless the owner could have met the service requirement at the time the plan was originally established. If business not in existance (in 1999), then there can be no service for it. ???

A standard election form will do specifying a "percentage" of their compensation and/or "100% of compensation up to $____." Once the amount is determined it can be contributed. Compensation in realit meaning their "earned income."

Agreed (as edited).

It is based on net earnings from self-employment (NESE) which is defined in Code Section 1402(a). See any SIMPLE document. Generally, NESE is 92.35 percent of their net profits from self-employment. Thus, the elective and the match/nonelective may not exceed an owner's NESE.

While earned income is deemed earned on the last day of the fiscal year, it is possible that it is not determined until a latter date. [The election to defer, however, MUST be in place by 12 p.m. on the last day of the business's taxable year, generally December 31.] Thus, the elective amount, in the case of a self-employed individual, may be contributed after the end of the year. Also the 15 day rule for a SIMPLE IRA is NOT a safe harbor if segregation could occur earlier. When the plan asset regulations were proposed, two comments were received by the DOL relating to when contributions by partners become plan assets. Those letters asserted that a partner's compensation is deemed currently available on the last day of the taxable year and that an individual partner must make an election by the last day of the year. In the view of the DOL, under the final regulations, the monies that are to go to a qualified 401(k) plan by virtue of a partner's election become plan assets at the earliest date they can reasonably be segregated from the partnership's general assets after those monies would otherwise have been distributed to the partner, but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner. [Emphasis added] [Preamble, ERISA § 2510.3-102] It is unclear to what extent a sole proprietor could rely on those regulations. IF the DOLs comments are based on partnership taxation rules, then to that extent, they might not apply to a sole proprietor (but, IMO, I think they would). The following example explains how this rule might apply in a typical related situation. Example. The Able-7 Partnership maintains a SARSEP (15-day DOL rule). On December 31, 1999, the last day of its taxable and plan year, all the partners individually elect to defer the maximum amount into their SARSEP-IRAs (not to exceed $10,000 per person). During the year, each partner had a monthly draw of $2,000 cash against eventual earnings. The firm's accountant is ill and will not be able to compute Able-7's net earnings by the due date of Able-7's return and therefore files for an extension of behalf of the partnership and each of the partners. On June 27, the partnership is notified by its accountant that it indeed had a profit and that each of the partners is due an additional $37,000. Able-7 must deposit $70,000 as contributions to the SARSEP-IRAs of its seven partners as soon as the amounts can reasonably be segregated from the partnership's general assets, but no later than 15 business days after the end of the month of June. For deduction purposes, the amounts must be deposited by July 17, 2000, the extended due date of Able-7's 1999 return. Hope this helps.

The method used by the IRS (see page 2 of Schedule SE (Form 1040)), is used below, to yield $4,180.94 (1/2 of the IRC 164(f) deduction)--- SEP plan formula: $22,609.39 contributed OR 13.65587 percent of compensation up to $80,400 plus 19.35587 percent on compensation in excess of $80,400 (up to $170,000 for 2001) Pre-plan: $132,000 owner 2 employees earning $25,000 each Allocations: (A) $15,781.45, (B) $3,413.97, © $3,413.97. $132,000.00 - $6,827.94 (non-owner contribution - 100%) =$125,172.07 x .9235 =$115,596.41 (line 6) $80,400 (twb) -$40,000 (credit for W-2) =$40,400 (line 9) x .124 (6.2% x 2) =$5009.60 (line 10)(lesser of line 6 or line 9 x 12.4%) lesser of line 6 or line 9 x .029 = $3,352.29 (line 11) line 10 + line 11 = $8,361.89/2 = $4,180.94

For 2001, the SEP contribution would not have to be aggregated with the 403(B) contribution unless (1) the individual was also in control of another organization (as here) (see Treas Reg 1.415-8(d)(1)), or made the alternate election ("C" election) to use the 415 limits. For 2002, only item (1) above could apply. [see IRC 415(k)(4), amended by EGTRRA, effective for limitation years beginning after 1999 (yes, 1999); which is nearly identical to (and codifing) the rule contained in existing Treas Reg Sec 1.415-8(d)(2)]

Unless your filing Form 1040C -- Departing Alien Income Tax Return, your elective contributions and match/nonelective are deducted entirely on line 29 of Form 1040, nonowner contributions are claimed on line 19 of Schedule C (Form 1040). If you are indeed filing Form 1040C, your contributions for the year are reported in Part III, line 16 of the form; attach a schedule, it is required.

Service for SEP purposes DOS NOT require that compensation be paid. If the individual performed any service in 1999, then a 2-year service requirement will work for owner--participation to commence in 2001.

Assuming 1/2 of the SE tax and non-owner contributions are known, then the 25% exclusion limit is 20% of the remaining EI (up to $40,000) plus $1,000 if catch up applies. The employer's deduction limit is higher (but if overage allocated, the amount can not be allocated to this participant).

Yes, performing service, however short, is service. With a one-year service requirment, the employee commences participation on the first day of the following plan year, generally January 1. [iRC Sec 401(k)(2)(B)]

Use compensation for the entire year, it is reguired under regulations.

For more information see message entitled JCWAA Amend EGTRAA. 5% of $44,000 = $2,200 (.25 - .05) / 1.25 x $44,000 = $7,040 $7,040 (elective) + $2,200 (employer) = $9,240 Proof: ($44,000 - $7,040) * .25 = IRC 402(h) limit = $9,240.

Lori, You got it. And the 415 limit prevents the amount allocated (including elective contributions) from exceeding 25 percent of pre-plan compensation (up to $170k) or $35,00 for 2001.

Had the above example been for 2001, then the applicable limit would be based on EI up to $170,000. If the sum of the employer and employee elective contributions exceeded more than 15 percent of aggregated "taxable" compensation (limited to $170,000 for 2001 per indvidual), the employer contributed too much. If the plan is integrated for example, then some individuals will get a greater percentage of the employer contribution. If an individual with compensation of $170,000 deferred $10,500, they could be allocated up to $24,500 of the employer contribution. There would have to be a lot of employees (and not making too high of an elective contribution) for this to happen.

The deduction limits prior to 2002 were based on taxable compensation and excluded elective contributions. Thus, if an individual with gross pre-plan W-2 compensation of $10,000 deferred $500, the aggregate deduction limit would be based on $9,500 under Code Section 404. In your example, the $1,000,000 of compensation of the partner is not reduced below the $170,000 limit after all applicable reductions under Code Section 401©(2). Thus, the aggregate 15 percent deduction limit for 2001, attrbutable to this partner, is $25,500 ($170,000 X .25). Elective plus allocated employer contributiopns made to this individual may not exceed $35,000 for 2001.

[From Temp Reg 1.414(q)-1T] Q-9: How is the "top-paid group" determined? A-9: (a) General rule. An employee is in the top-paid group of employees for a particular year if such employee is in the group consisting of the top 20 percent of the employer's employees when ranked on the basis of compensation received from the employer during such year. The identification of the particular employees who are in the top-paid group for a year involves a two-step procedure: (1) The determination of the number of employees that corresponds to 20 percent of the employer's employees, and (2) The identification of the particular employees who are among the number of employees who receive the most compensation during this year. Employees who perform no services for the employer during a year are not included in making either of these determinations for such year. (B) Number of employees in the top-paid group -- (1) Exclusions. [Reserved] See section 1.414(q)-1, Q&A-9(B)(1) for further information. (i) Age and service exclusion. The following employees are excluded on the basis of age or service absent an election by the employer pursuant to the rules in paragraph (B)(2) of this A-9: (A) Employees who have not completed 6 months of service by the end of such year. For purposes of this paragraph (A), an employee's service in the immediately preceding year is added to service in the current year in determining whether the exclusion is applicable with respect to a particular employee in the current year. For example, given a plan with a calendar determination year, if employee A commences work August 1, 1989, and terminates employment May 31, 1990, A may be excluded under this paragraph (B)(1)(i)(A) in 1989 because A completed only 5 months of service by December 31, 1989. However, A cannot be excluded pursuant to this rule in 1990 because A has completed 10 months of service, for purposes of this rule, by the end of 1990. (B) Employees who normally work less than 17 1/2 hours per week as defined in paragraph (d) of this A-9 for such year. © Employees who normally work during less than 6 months during any year as defined in paragraph (e) of this A-9 for such year. (D) Employees who have not had their 21st birthdays by the end of such year.

The entire contribution made to an SE is claimed on the 1040. A SE does not generally receive a 1099 (see ILM 200117003 and Rev Rul 69-184 [1969-1 CB 256]). The starting point is bottom line schedule C. A SE employed individual CAN NOT receive a W-2 from his/her business. SE income is not "wages" for FICA, FUTA, or FIT source withholding.

If over the age of 21 he can have a SEP based on his EI. He can also participate in the P/S plan. Since they are not otherwise related/controlled/affiliated (because he owns not more than 50% of any other business) there are no 415 issues (other than applied separately to each business's plan(s). In computing the SEP contribution, however, his W-2 income (although not considered for benefits) is taken into account in computing the 1/2 of of the social security tax deduction) offset. Depending upon his income and the amount he wishs to contribute, a SIMPLE-IRA ($7,000 + 100% match up to 3% of compensation) sd also be considered.

If the child is under the age of 21, then he may have to be included in the P/S plan, unless the plan can qualify without the child. If the child (under age 21) opens a SEP, then employees of the father's business would have to be included in the SEP. Although the family "aggregation rules" have been repealed, the controlled/related/affiliated group rules are very much alive. IRC 414(B), 414©, and 414(m).

If the child is under the age of 21, then the businesses are related (treated as a single employer). [irc 1563(e)]. The business cd be related under other theories too--part of an affilliated service company under IRC 414(m) if one business performs services for the other.