Gary Lesser

Although there is little on point concerning a SEP, a private letter ruling sd be sought. That being said; the compensation was not received for services rendered in the current year. Neither was the individual an employee. IMO, no contribution is required for the current year. Whether a make-up contribution is required for an earlier year and whether it can be made now is entirely another question. If the individual was an employee at the time the award was made, then a contribution wd be required for that year.

5% OF $10,000 (AND NOT IN EXCESS 15% = 13.04%) HCE = 6.25 Max E/er contribution for HCE w/ $10k of comp. is $1,406.25. $625 + 781.25 = $1,406.25 $10,000 - $625 = $9,375 X .15 = 1,406.25

The plan can not impose a restriction, but an investment minimum is okay, so long as there is at least a CM account to hold the IRA assets until the investment minimum is reached. Other than in the prospectus, no disclosure is necessary.

Whether the plan is top heavy depends on the document used. If a model plan and a key employee participates, it is top heavy. If a prototype, nearly all of them use the percentage method (but not all). Generally, an employer elects to use aggregate contributions (including elective) rather than account balances (which an e/er rarely knows)

In determining if an employee in a SARSEP (employer is a corporation) has deferred over the 15% of comp limit do you first exclude the deferral amount (i.e. total gross compensation minus deferral X 15%)? CORRECT In determining the deferral percentage for the ADP test in a SARSEP the deferral amount is a percentage of the total gross compensation (which includes the deferral), correct ? NO. Determine the PERCENTAGE contributed by each Non-HCE employee determined separately. Add the percentages and divide by the total number of people that could have made a contribution. Multiply by 1.25 for HCEs. DO NOT use a dollars/dollar approach-it doesn't work. Has any of this changed for plan years beginning in 2002? Not yet (but see HR 3529). In HR 3529 (if enacted) the SEP EXCLUSION limit would be 25% of TAXABLE compensation (20% of gross comp) but is NOT increased for elective. The deduction limit would be incresed (from 25%) to 25% PLUS Elective amounts. Thus, the proposed TC is almost as bad as the initial law (EGTRRA).l

If SIMPLE IRA invalidated, amounts contributed should be shown in box 1 of Form W-2, enter $0, in box 13. Employees sd, but not required, to remove "excess." If nondeductible contributions are not reflected on Form W-2 then the 10 percent penalty may apply. Apparently, the 6 percent penalty does not apply to a SIMPLE IRA (even if excess not removed timely); when removed after the due date, however, the includible amount may be taxed again when distributed. SIMPLE contributions (unlike SEP contributions) do not increase the amount under IRC 408(d)(5).

No prohibition. If taxed as a partnership, then use earned income of owner, otherwise W-2 compensation for the year. Dividend/profit distributions do not qualify,

Because of the compensation cap of $200,000 (for 2002), the $40,000 (for 2002) limit under Code Section 415 can not be reached with a 15% limit, so $30,000 with just a SEP.

It doesn't. The employer hasn't changed, only its tax status. Service is service (prior, current, and future). [Assumes that the prior unincorporated trade or business no longer exists as a sole-proprietorship and there are no "related" emplyers to speak of.]

Compensation does NOT include amounts deferred under a Section 125 plan for SIMPLE purposes.

Yes, but it is based ONLY on his/her W-2 income. Not a bad idea to have the succesor entity readopt the plan. Notify all investment accounts/brokers and request a name change(if needed).

It is unclear whether the 25% or 10% penalty under Code Section 72 applies. Perhaps it can be explained away regardless of how coded by the trustee. For what it's worth-- In a meeting held on September 25, 2000 (in Arlington, VA), between representatives of ASPA and Paul Shultz, Director of Employee Plans, Rulings and Agreements and Richard Wickersham, Chief, Projects, Branch 2 of the IRS they stated that the 25% penalty would NOT not apply when an employer adopted a 401(k) plan invalidating the qualified salary reduction plan in the SIMPLE. I am not aware of any other guidance on this issue. In my opinion the 25% penalty should not apply. If there is/was a loss, it might not matter The over-contribution (whatever it was) is now an excess contribution. The employer sd include the amounts on the e/ee's W-2 as regular wages in Box 1 to avoid the cummulative 10% nondeductible excise tax on nondeductible contributions. If not placed on Form W-2 a 10% penalty will apply for many years as the employer must correct (AND that's about all it can do, turn the amount into a prohibited employee contribution, by reporting the amount as income (=distribution/correction)). The employer sd (but not required to) give explanation letter that excess simple contributions were added to form W-2 and MUST be removed by employee with any gain by 3/15/2002 (or due date) to avoid 6% penalty. Can't be used up by employee. E/er can not remove money, but can reduce future compensation if not in violation of any contract or state law. The employee sd request a correcting distribution and that the 25% penalty code not be used (an include a copy of the employers letter explaining the excess). Hope this helps.

Anything contributed counts against the 15% limit. It creates an excess in the IRA that can ONLY be removed by the IRA owner. The e/er can not cause a distribution. If it only is an ADP violation (an not a 15% limit violation), special notice requirments must be satisfied. Either way the excess is reported in box 1 of Form W-2 (the full amount of the elective is reported in box 13). The employer can contribute the difference (up to the 15% of net amount), but the allocation must be uniform in percentage (or integrated with social security). Can't just willy nilly up everyone to 15%.

In the case of a SIMPLE, the excess sd be reported on Form W-2. That will end the 10% penalty if done befor the due date of the employers return. The employees may have to pay 6% penalties if their IRA contribution limit is exceeded, unless timely corrected. The plan is not disqualified.

Yes. Don't contribute more than 15% of taxable compensation until limit is formally changed. [Annual ASPA Convention, 2002)

For this purpose, to maintain a plan which would invalidate (for that year) a SIMPLE-IRA means to accrue a benefit (in a DB for service in that year) or to receive a contribution in a dc plan (other than forfeiture) or a SEP/SARSEP. Since the SARSEP was not terminated it would appear to remain grandfathered. There are no cites or information on this point. Getting a PLR would be prudent. However, the SEP/SARSEP exclusion limit (IRC 402(h)) still limits nonreportable contributions to 15 percent (although 25% is deductable--but don't do it). If not integrated, $30,000 is the maximum SARSEP contribution ($200,000 x .15). The 415-$40,000 limit is also reduced under IRC 402(h) if the plan is integrated (but not lower than $35,160.70 ($40,000 less (.057 X $84,900)).

Assuming the individuals are employed by both entities, they can participate fully in both plans, but only to the extent of their compensation from each employer. If employers related, controlled, or affiliated, then the employers are treated as one employer and the SEP contributions are treated as contributions to a defined contribution profit-sharing plan. If an individaul ownes more than 50% of both businesses, then the 415 limits (100%/$40,000 for 2002) applies (even if not a controlled group).

The model amendment set forth in Revenue Procedure 97-9 [1997-1 CB 624] contains a model revocation clause that permits employers to revoke the 401(k) SIMPLE provisions without terminating the plan. The revocation clause should be executed only if the employer wants to revert to the plan provisions that apply in the absence of the 401(k) SIMPLE provisions under the model revocation clause. Any such revocation is effective as of the first day of the calendar year following the date revocation is adopted. It would be far less expensive to amend the existing plan, Rather than terminating it and transferring the assets to a new plan.

A qualified plan can be converted to a 401(k) simple. See Rev Proc 97-9 for starters.

1. Is a Simple-401(k) plan a qualified plan? Yes 2. Do the Simple-401(k) plan assets have to be held in a trust ? Yes. 3. Does a Simple-401(k) have to have a plan document, adoption agreement, and determination letter ? The determination letter is optional. A plan, trust, SPD is required. 4. It's my understanding that a Simple-401(k) that has participants other than the employer/owner must file a Form 5500. All corporations (and partnerships and sole proprietorships with non-spouse-owner employees) must generally file. 5. Can a Form 5304-Simple or Form 5305-Simple be used to set up a Simple-401(k) plan ? No. 6. Do participants have to be given a Summary Plan Description? Yes. 7. In order to terminate a Simple-401(k) plan, must all the regular termination steps involved in terminating a qualified plan be followed .... or can the employer simply tell the participants that the plan has terminated and then disburse all the account balances ? Formal termination is required.

For the most part this will be handled by the document providers later this year. See Rev Proc 2002-10

Simple contributions (match on elective and nonelective) are based on compensation for the entire year. Generally, a 401(k) Simple can be amended, but the amendment is not effective until the first day of the CY following the date of adoption. See Rev Proc 97-9.

Forced participation. Form 5305-SEP indicates that an employer may require an employee to join its SEP as a condition of continued employment At least one state court has addressed the issue of providing a summary plan description (SPD) for a SEP. In Schultz v Production Stamping Corp [434 NW 2d 780 (Wis 1989)], the court held that ERISA does not require that an SPD be given to an employee before SEP coverage begins. That ruling was less broad than it would seem because the employer distributed a copy of Form 5305-SEP to its employees. Form 5305-SEP was the plan document and contained summaries and disclosures. In addition, the employer held a meeting at which the plaintiff-employee asked no questions. The employee signed up, but her husband persuaded her to go back the next day and cross her name out. The employer warned the employee that she would be fired, and she was. The court, reversing a lower court damage award of $173,000, concluded that it was reasonable for the employer to discharge the employee because one employee should not have the power to destroy the pension arrangement for all the other employees. (The explanation portion of the standard SEP plan document confirms that the employer may terminate an uncooperative employee.) [see Form 5305-SEP, Information for the Employee, SEP Participation.] The court in Schultz also had to rule on the issue of whether, in Wisconsin, such a discharge would be impermissible as a matter of public policy. Again, the court noted that the employer's disclosure exceeded the minimum requirements of ERISA; there could be no bar to a dismissal authorized by ERISA.

Appleby, You ARE correct. My apologies.

IN GENERAL AND UNLESS CHANGED BY A TECHNICAL CORRECTION: Note: How the section(s) is/are changed is important, see discussion later. 1) SEP Deduction Limit - The employer may claim a deduction for contributions (including elective deferrals) to the extent contributions do not exceed 25 percent of all participant's aggregate compensation (determined without reduction for elective contributions). But see item 3. 2) The IRC 415 limits of 100 percent and $40,000 apply, but rarely so, unless there is second SEP or or qualified plan maintained by the employer. Employers will not generally contribute more than they can deduct (item 1) and, unless corrected, even less -- that is, more than can be excluded from a participants income (item 3) 3) SEP Exclusion Limit - Amounts allocated to a participant's account are included in income (treated as W-2 wages, or not deducted if self employed) to the extent that the contribution (including elective deferrals) exceeds the lesser of: a. 15 percent of compensation includible in gross income, or b. $40,000 (reduced if the plan is integrated by the spread percentage (max 5.7%) times the plan's integration level (max $84,900)). Thus, the maximum that could be contributed in a SEP plan that is fully integrated at the taxable wage base would be $35,160 (40,000 - ($84,900 x .057)). Note: Under EGTRRA, elective deferrals are not seperately deductible (25% limit), nor excludible (15% limit), and are included in determining the $40,000/100% limit DISCUSSION: Although the EGTRRA did not make any changes to the rules regarding the participant's exclusion of SEP and SARSEP contributions under Code Section 402(h), technical corrections are likely to be forthcoming. It is unclear to what extent Code Sections 402(h) will be changed, if at all. The practitioner will need to examine any change by taking into account the following: 1. Whether the "percentage limit" (currently 15 percent) on the exclusion of contributions from a participant's income, is increased (i.e., to 25 percent). [iRC § 402(h)(2)(A)] 2. Whether elective contributions (within appropriate limits) are excluded from a participant's income in addition to the percentage limit (up to the $40,000 aggregate limit under Code Section 415). 3. Whether elective contributions continue to be excluded for the purpose of applying the percentage limit, thus requiring that only "includible" (taxable) compensation be considered [iRC § 402(h)(2)(A)] 4. Whether the reduction to the $40,000 (for 2002) limit should continue to apply when the plan is integrated. [iRC § 402(h)(2)(B)] With a projected taxable wage base (TWB) of $84,900 for 2002, the maximum SEP contribution for 2002 would be $35,160.70 ($40,000 - ($84,900 x .057)) in a plan fully integrated at the projected TWB amount. The language of Code Section 402(h)(2)(B) would appear antiquated and inconsistent with current legislative intent. 5. Whether the compensation cap of $200,000 under Code Section 401(a)(17) for 2002 will apply for the purpose of the percentage limit, which in the authors opinion, it has never been subject to, although it does apply to Code Section 415. 6. Whether elective contributions (within appropriate limits) are deductible by the employer in addition to the 25 percent of aggregate compensation deduction limit (but not in excess of the $40,000 per participant limit under Code Section 415). [iRC § 404(n)]. I submitted a comment to Treasury and Senate officials on July 18, 2001, proposing the following changes be made to address these issues: (I) Advocating the use of a NEW form (Form 5500-S) for SEP reporting and compliance. Esentially this form would cover coverage, contribution, and (although seldom needed) bonding requirements. The one page form would be easy to complete. (II) Amend Code Section 402(h)(2) (dealing with the exclusion from income) as follows: "Limitations on Employer Contributions. - Contributions made by an employer (other than elective deferral contributions made pursuant to an arrangement under section 408(k)(6)) to a simplified employee pension with respect to an employee for any year shall be treated as distributed or made available to such employee and as contributions made by the employee to the extent such contributions exceed the lesser of - (A) 25 percent of the compensation [Authors Note: Or "includible compensation," see item 3 above] (within the meaning of section 414(s)) from such employer for the year (determined without regard to the employer contributions to the simplified employee pension), or (B) The limitation in effect under section 415©(1)(A). " (III) Strike the remainder of Code Section 402(h)(2)(B). (IV) Amend new Code Section 404(n) (dealing with the 100 percent deduction rules for elective deferrals) as follows: "Elective deferrals (as defined in section 402(g)(3)) shall not be subject to any limitation contained in paragraph (3), (7), or (9) of subsection (a), or subparagraph © of subsection (h)(1), and such elective deferrals shall not be taken into account in applying any such limitation to any other contributions." Amounts (including elective contributions) that exceed the exclusion limit (currently 15%) should be reported as "wages" on an Employee's Form W-2. In most likelyhood, this will eliminate the 10 percent nondeductible contribution penalty tax under Code Section 4972.