Gary Lesser

Treat all SARSEP contributions as W-2 wages for all purposes (and include the deferral amount in box 13 also). It is still in the IRA and is treated as now made by the individual (which, of course, is a prohibited excess contribution).

The second option referred to above ONLY applies in the case of a Roth-IRA recharacterization. In the case of an IRA or SEP/SARSEP-IRA the loss can only be recognized when ALL of the assets are withdrawn from that IRA and the amount withrawn is less than the unrecovered basis. [ See my apology below.]

Absent state law to the contrary, a SIMPLE can be terminated at any time without further obligation. It can also be amended at any time (effective as of the beginning of the year) if the amendment is not inconsistant with the annual Notification to employees. If terminated mid-year (OTHER than by the adoption of and accrual of benefits in another plan), it is still possible that the SIMPLE remains valid for the tax year. All contributions must be made prior to termination.

Fred divides his basket business into basket weaving and basket marketing to create two SEPs and maxes out on both. (This would seem prohibited because a controlled group rule would aggregate Fred's contributions under one limit.) AGREED. IRC 414(B) & ©/1563 George who is seasonally employed (teacher, snow plow operator in Buffalo NY) participates in the employer's 401k or 403b plan during the winter and successfully guides canoe trips in the summer as a sole proprietor or sole owner of an LLC or Sub S . Is there anything to prevent George from creating a SIMPLE or SEP for the canoe business and contributing the maximum under that plan for his summer work? NO, but the 415 limt (100%/$40,000 for 2002) would apply if George owned more than 50 percent of both businesses. The elective contributions to all plans George participates in would be limited to the 402(g) limit ($11,000 or $11,500 fore 2002). In both cases, even if the entities were not "controlled / related / affilliated." The 402(g) is an individual limit. Elective contributions under 457(B) plans are NOT mentoned in 402(g) and are are based on includible (taxable) compensation. Harriet the hard working realtor is an idependent contractor with a SIMPLE plan. Late in the year she lands the sale of a lifetime and decides to drop the SIMPLE as of Nov 1 and start a SEP to defer as much as possible from a year end $200,000 commission. Anything to prevent Harriet defering the SIMPLE maximum on her early in the year $50,000 of earnings PLUS the maximum SEP on the year end $200,000 earinings? YES & NO. Simple compensation is based on the amount earned for the full year. If she starts another plan for any part of 2001 and accrues any benefit in respect to her service in 2001 her SIMPLE compensation is an excess and should be treated as regular "wages" for all purposes. Amounts reported on Form W-2 box 1, should NOT also be reported in box 13. The amount sd be removed by Harriet by April 15, 2002 (generally) along with any gain attributable to the excess. ( Tom Poje on another board advises a SIMPLE must be the exclusive plan for the year and that if a qualified plan is established after the SIMPLE plan is funded, the SIMPLE is invalidated and contributions must be returned by the due date of the employee's tax return. This particular question is cited in The ERISA Outline Book as well - 2001 edition , page 12.21 Remember, the exclusive rule for SIMPLEs includes 403(B)s, 457s and SEPs as well. ) AGREED, but an employer can not cause an amount to be distributed. To avoid the nondeductible excess tax the excess amount sd be treated as "wages" on Form W-2. Does the prohibition against double dipping of contribution maximums arise only in contolled group situations as with Fred and Harriet? Is George OK in what he is doing? Is there a consistent overall philosophy that controls such situations? CONSISTANCY IS THE HOBGOBLIN OF PETTY MINDS; of course not! Hope this helps.

IMO, the excess amounts for current year should be included on Form W-2 as "wages." This, in turn, causes the contribution to have been made by the individual and are thus, excesses, and should be removed by April 15 with any gain. (See IRC 408(d)(4)) For the prior year, same, except that the individuals would appear to owe a 6% excise tax (for 2000) until corrected. Presumably the gain from 2000 overcontributions can remain in the account. The employer will have to pay a 10% penalt for 2000 and, unless included on amended 2000 W-2s, another 10% penalty each year until corrected (Form 5330). Arguably, the amount distributed in respect to 2000 is taxed a second time (see IRC 408(d)(5)) because it exceeds the amount allowable as an IRA contribution deduction. The instruction for Form W-2 state that any elective contributions reported in box 1 is not included in box 13. This is the only statement made by the IRS regarding excesses. Informally, the IRS has a different view--the SIMPLE is invalid if there is an excess of $0.01 or more. This view is not stated in writing and no correction procedure has been announced. I hope this helps. In a conversation with the Service about a year ago, they informed me that the 6% penalty doesn't apply because a SIMPLE was not an employer plan. I brought up the correction procedures for SEPs, saying that the SEP/SARSEP and SIMPLE were indeed employer plans. This conversation was terminated because the individual I was speaking with was a moron.

Although the overall SARSEP deduction limit was increased by EGTRRA to 25%, the amount that can be excluded from income remains 15% of TAXABLE compensation. A technical correction is likely, but the law still reads 15%--so that is the answer.

If it is the same company, same employees, with just a new name (old company no longer exists), the "new" employer can amend the plan to state that the employer's name has changed. The sponsoring financial institutions should be informed of the change in employer's tax i/d number and name change. The "existing plan" should be okay. If this is a merger or aquisition, then different rules may apply.

The entire amount is claimed as an adjustment/deduction on line 30 -"Self-employed SEP. SIMPLE, and qualified plans" of Form 1040. Contributions for nonowners are claimed on the Schedule C.

In that case, then the individual would only be attrubuted with the stock of adult children (age 21+) if he/she owned more than 50%. [iRC 1563(e)(6)(B)]

I was recently informed that UNDER insurance law an individual is deemed to attain a given age at 12 p.m. the day before his/her birthday is celebrated. (No cite provided) I'd appreciate any additional comments, especially citations on this subject.

The 25% limit under Code Section 404 is based on a self-employed's net earned income which does not include any of the contributions made by or on behalf of the SE individual (and must be further reduced by 1/2 of the SE tax deduction and share of non-owner contributions). That being said, Code Section 404(a)(12), adds the elective contributions (and catch-up contributions) to compensation in calculating the 25% deduction limit. In the case of a 401(k), the elective contributions (and catch-up contributions) are then separately deductible under Code Section 404 (in addition to the 25% limit amount). The SE individual claims all of his or her contribution deductions on page 1 of Form 1040.

Under Code Section 1563(e)(6)(A), the father is deemed to own the stock of his children under the age of 21. Thus, employees of the other businesses must be treated as if employed by a single employer.

Suppose an individual (other than a special needs beneficiary) reaches their 18th birthday on December 31, 2002. Although I agree that January 1, 2003 is the first "date" after the individual's bithday, the statute must also be interpreted in accordance with Congressional intent; which states: ... "Such contributions may not be made after the designated beneficiary or account holder reaches age 18." Arguably (the IRS view), the individual attains age 18 the moment December 30th ended; thus, the individual already attained age 18 on his or her birthday and that date (December 31) is after the individual reached age 18. Note that the Conference Committee Report did not contain the words "after the date," using instead "after...reaches age 18." Arguably, you and the the IRS are correct in your interpretations (it's too late). Since the IRS has reasonably interpreted the statute, ther is no longer any conflict.

To avoid ERISA, a 403(B) plan can be established that does not allow for employer contributions (other than by salary reductions). The same employer might adopt a SEP to permit "employer" contributions. Starting in 2002, both plan types are subject to Code Section 415.

In general, contributions to a SEP are discretionary and need not be made from year to year. Thus, they are merely forgotten when adopting another plan. OTOH, if they are formally terminated by an amendment, the plans procedure for providing a notice of the amendment and a notice as to the effect of the amendment are required. In the later case, a new SEP plan (but not SEP-IRAs) would be required. Although the effect of contributing a plan in addition to a SIMPLE invalidats the SIMPLE contributions for a year, I see no reason why a SIMPLE plan couldn't survive such an event (assuming all notices given timely) and unless formally terminated by amendment and presumably notice).

Yes. Pick up copies of a SIMPLE plan and SIMPLE IRA documents from a sponsoring financial organization. See, too, IRS publication 590.

Although a SEP may be "treated" as a qualified plan for many purposes, it is not a "qualified plan;" that is, a SEP does not meet the requirement under 401(a) for an exempt trust under 501(a). The SEP LRMs do not provide for any offset of SEP contributions for a leased employee treated as an employee of the employer to adhere to 415. In fact, under 415, a SEP is generally the last plan disqualified (and corrections made in the qualified plan). Have you seen any SEP documents that contain such language (when the safe harbor 20% MP contribution is NOT made, IRC 414(n))? While SEPs are subject to 415 (and 414(n)), I do not recall that the documents need to mention anything about the 25% limits under 404 or 415. I'd be interested in more information on this point.

A prototype document must be used if the employer has any leased employees. If a leased employee is treated as an employee under IRC 414(n), then the SEP must include them if the leased employee is otherwise eligible. I am unaware that there can be any reduction/offset of a SEP contribution (if amounts are contributed on behalf of the leased employee by the leasing company to its own plan). Is there a cite for this?

** An existing employer may establish a SIMPLE IRA Plan effective on any date between January 1 and October 1 of a year beginning after December 31, 1996, provided that the employer (or any predecessor employer) did not previously maintain a SIMPLE IRA Plan. This requirement does not apply to a new employer that comes into existence after October 1 of the year the SIMPLE IRA Plan is established if the employer establishes the SIMPLE IRA Plan as soon as administratively feasible after the employer comes into existence. If an employer (or predecessor employer) previously maintained a SIMPLE IRA Plan, the employer may establish a SIMPLE IRA Plan effective only on January 1 of a year. [iRS Notice 98-4, K-1] 1) Can he contribute a max of $ 6,950 to his new Simple-IRA account for year 2001 (if he does in fact have $15,000 net profit from 11/20/01 - 12/31/01) ..... comprised as follows ? $6,500 elective deferral + $450 [3% match on $15,000 income] = $ 6,950 ** Almost so. $15,000 x .9235 = $13,852.50 = (NESE under IRC 1402) x 3 percent = $415.58 match. 2) By what deadline must he contribute the $6,500 elective deferral ? ** Generally, as soon as they can be reasonably segregated from the business assets, but not later than 15 days after the end of the month in which the payroll deduction was made. Note: partnerships may have a longer period; that is, not until the net income/loss is determined (and then the above rule applies). [see Preamble to proposed plan asset regulations [ERISA Reg 2510.3-102] It is not clear whether the partnership rule can be extended to a sole proprietor. 3) By what deadline must he contribute the $ 450 match ? ** By the due date of the business tax return (but only $415.58). 4) For next year (2002) ... must he contribute his elective deferrals monthly ? ... or can he wait and make one big lump contribution for the whole year 2002 ? ** Can wait, but must complete election forms before end of year (before profits are determined at 12 p.m. on Dec 31). 5) Since he gets no salary check from his business (remember he is a sole-proprietor) ... are the words "elective deferals" & "match" the proper terms to use when discussing his contributions ** Yes.

Agreed. Assuming, however, the individual was never self-employed before 2001, he or she would have to use a "0" year service requirement to participate.

The conversion of the entire IRA to a Roth IRA is permitted so long as the substantially equal payment stream continues from the Roth IRA. [Treas Reg Sec 1.408A-4, Q&A 12]

You are correct. It would have to be a prototype SEP.

If 72(t) applies, then the entire amount in that IRA would have to be converted. Otherwise a "modification" would be deemed to occur.

2002 - IRC 404(h) SEP Deduction Limit under EGTRRA, and 2002 - IRC 402(h) SEP Exclusion Limit under EGTRRA, and 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.

If this is a new plan, the other entity can probably adopt it. Why do you say they don't qualify for a SEP, or, if under 25 employees a grandfathered SARSEP? If coverage is not met, it is unlikely that this egregious error can be fixed under IRS CVR programs. The amounts contributed are W-2 wages and the contributions are excesses in the IRA (except to the extent they could make an annual $2,000 contribution).