Gary Lesser

Without some "entity" (see above message) the amounts contributed are not deductible AND arguably subject to the 10 percent nondeductible contribution penalty tax (ditto for SEPs). [unlikely that statute of limitations will expire unless, in general, Form 5330 filed] However, the houshold may set up a SIMPLE 401(k) or SIMPLE IRA effective no sooner than the 2002 tax year. The required employer contributions under the SIMPLE would not be deductible, nor subject to the 10 percent tax. [EGTRRA Sec 637(a). ©, and (d)]

No. The other plan wd have to be effective after 2001; otherwise the SIMPLE IRA contributions will be turned into "wages" and "excess contributions" (assuming contributions are made to new plan) In the case of a SEP, the SEP and P/S plan share the same limit. Generally, a SIMPLE must be the only plan of an employer. Exceptions would include a union plan for union employees that don't participant in the SIMPLE or a situation involving merger or acquisition when the entities (before such event) had another plan.

The date the new SEP/SARSEP is signed (and IRAs established for eligible employees) is the date the provisions of the new agreement become effective. The 'grandfathered' agreement should of course be maintained in the employer's plan file. The original effective date is not usually asked for.

Prototypes are pre-approved as to form and a determination letter will not normally be issued to the adopting employer. Many prototypes provide for integration and are generally available without charge from the financial institution that will also (generally) maintain the SEP-IRAs of participanting employees.

In general, yes. Conversions are not limited to thee "one in 12-month" rule and are treated as distributions to the IRA owner regardless of how transferred. If eligible to make a conversion, and no part is a required minimum distribution nor a periodic payment excepted under Code Section 72 from the 10% penalty, a step conversion is possible. Keep good records in the event you need to make a withdrawal (of a converted amount) and/or are under age 59 1/2.

Assuming the SEP was properly adopted and not formally terminated, there is no reason why the employer could not make current contributions into it and the 401(k) profit sharing plan (assuming all eligible employees participate and IRAs are established). The SEP contributions reduces the otherwise allowable profit-sharing limit under Code Section 404; and Code Section 415 applies to both plans in the aggregate. If either plan is top-heavy, special rules may require that any employee eligible to participate in either plan receive a top-heavy minimum contribution.

Just an added note: The four-step integration leval assures that all employees get up to 3 percent (of compensation). Thus, the employer will always satisfy the top-heavy test (without having to test). After that, the remaining contribution is allocated (and maximum spreads reduced to take into account the 3 percent already allocated (5.7% reduced to 2.7%)). BOTH methods produce EXACTLY the same results PROVIDED at least 3 percent is contributed. [That is, a base percentage of at least 3 percent when the formula method is used.]

In the case of current year's elective contribution, that amount amount cannot be withdrawn, rolled over. or tranferred until March 15 of the subsequent year (or earlier determination by the employer that the deferral limitation test for that plan year has been completed). It is unclear, as to whether this restriction only effects HCE. But the model elective deferral form appears to bind all employees to the "earlier of" rule.

It all depends on how fat the bookkeeper is. Was this a SARSEP? This SEP may be subject to the bonding requirements of ERISA (see below) -- So I'd also contact the DOL. Criminal penalties (under ERISA) may also apply. Under Section 4(a) of the Employee Retirement Income Security Act of 1974 (ERISA), only employee benefit plans within the meaning of ERISA Section 3(3) are subject to Title I of the act (regarding the protection of employee benefit rights), provided the plan is established or maintained by an employer engaged in commerce or in any industry or activity affecting commerce, or by an employee organization or organization representing employees engaged in commerce or in any activity affecting commerce, or by both. The term employee benefit plan includes an “employee pension benefit plan.” [ERISA § 3(3)] Most SEPs (and SARSEPs) are employee benefit plans under ERISA. Many exclusions and exceptions apply, however. Also, the protection afforded by ERISA may not extend to certain governmental plans or to church plans. [ERISA § 4(a), (B)] Section 3(2) of Title I of ERISA defines the term employee pension benefit plan as follows: Any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program— (A) provides retirement income to employees, or (B) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan. Plans without employees are not covered under Title I of ERISA. [DOL Reg § 2510.3-3] Thus, for purposes of Title I, the term employee benefit plan does not include any plan, fund, or program under which only a sole proprietor or only partners are participants covered under the plan. An individual and his or her spouse will not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, that is wholly owned by the individual or by the individual and his or her spouse, and a partner in a partnership and his or her spouse will not be deemed to be employees with respect to the partnership. BONDING In most cases, an employer that handles funds or other property that belong to an ERISA plan is required to be bonded. The basic standard is determined by the possibility of risk or loss in each situation; thus, it is based on the facts and circumstances in each situation. The amount of a bond is determined at the beginning of each year. It may not be less than 10 percent of the amount of funds handled, and the minimum bond is $1,000. Yet contributions made by withholding from an employee's salary are not considered funds or other property of a SEP IRA plan for purposes of the bonding provisions so long as they are retained in, and not segregated in any way from, the general assets of the withholding employer. Because employer contributions are made into SEP IRAs established by each employee (which are outside the control of an employer once made) bonding would not generally apply. [ERISA §§ 404©, 412; DOL Reg §§ 2510.3-3, 2550.412-5]

If a DB is established (and benefitts accure) during any period in which there is a SIMPLE plan; all contributions to the SIMPLE plan become excess contributions.

There is a 6 page printout that has all of the numbers and limits. The program (QP-SEP Illustrator) has been in existance for over 10 years and provides acccurate answers. The software can be ordered on BenefitsLink or by calling me at 317-254-0385 (during business hours). It also handles SARSEPs. Most prototype SEPs permit integration. Some provide for SARSEP contributions.

Although the two plans do not share a 402(g) limit, the individual does. Amounts deferred over the limit ($11,000 or $11,500) must be included on the employees Form 1040. Other than that the two plans/employers stand separately with respect to all limits since (assuming) the entities are not controlled or related to each other.

The calculation you requested follows: A SEP contribution of $22,609.39 would give the owner (who also has $40k of W-2 income from a nonadopting nonrelated entity) a maximum 15% contribution (integrated at the 2001 TWB of $80,400). Owner (15%) $15,781.45 (1/2 SE Tax $4,180.95 E/ees $3,413.97 each. Proof: (assuming SS tax is correct!): .15 X ($132,000 - $6,827.94 - $4,180.95 - $15,781.45) = $15,781.45 [sET tax calculations shown in later message - see below) If the integration level is changed to 20% of the TWB ($16,080 for 2001) a smaller contribution ($21,975.03) would yield more dollars to the owner, as follows: Owner (15%) $15,875.14 (1/2 SE Tax is $4,190.70) E/ees $3,049.95 each The integration level can be changed by amendment (and notice of amendment and its effect to employees). IMO, the amendment must be made on or before the date contributions for the year are actually made (others think by 12/31 and before contribution is made). Hope this helps. Are all eligible employees of related entities (if any) reflected in your information?

Failure to make a contribution may have state law implications. If the match is not made then all contributions should be reported in boxes 1, 3, and 5 on Form W-2 (or included in income is self-emploed). Best to give employees a notice that their contributions are (100%) excess contributions and must be returned (and so on, with gain).

Yes, the match is made on the amount elected to be deferred (including catch-up contributions).

A few thoughts--> Would the owner have been eligible with a one OR three year requirement AT THE TIME THE PLAN WAS ORIGINALLY ESTABLISHED. A one-year requirment would have required service to have begun in 1997; 1995 with a three-year requirment. I do not believe that correcting contributions can be made (see above regarding egregious errors) in this case and that the amounts contributed are all excesses. Also, the 10% tax is cummulative, that is, until the amount is included on W-2 or (taken into income if self-employed). Thus, the 1998 excess is subject to three 10% penalties (1998, 1999, and 2000; 4 penalties if not taken into income in 2001). It is unlikely the bank changed a "1" to a "3" or a "3" to a "1." It is more likely that the form was blank; thus the requirement "that all blanks be completed" was not met and the plan was actually never adopted. If the bank added anything after it was signed, the "amendment" doesn't count! If the bank did complete the agreement and it was LATER signed without having been read, then it would appear that the client has a big problem. If the SEP-IRA has all assets withdrawn and there is a loss (a la Bin Laden) the loss may be deductible under Code Section 212 (subject to the 2% AGI limit) as a miscellaneous itemized deduction.

The trustee would not issue a check to the Sub S. The amount should be reflected in boxes 1, 3, & 5 of his or her W-2. If not the 10% penalty for nondeductible contributions would apply. The amount in the IRA is also an excess and would appear to be subject to the 6% cumulative nondedeuctible excise tax penalty since it was not corrected timely (reduced by any allowable annual IRA contribution). Hope this helps.

The establishment of the second SIMPLE for the controlled group would invalidate both SIMPLE-IRAs. In general, an employer that maintains a SIMPLE IRA may have no other plans (including another SIMPLE-IRA). See specifically IRC Sections 408(p)(2)(D)(i) and 402(g)(5)(A)(vi).

I essentially agree and the contribution would relate back. But I do not believe that the trustee is able to accept it. Clearly, this is ripe for a technical correction. Until guidance is issued, it would be best to adhere to the rule that contributions cannot be accepted after age 18, notwithstanding the extended contribution deadline efective next year. I am more concerned with the 402(h) limits applicable to SEPs regarding the deductibility of 25% and the inclusion of amounts contributed in excess of 15%--have you head of anything in that regard.

In most likelyhood the power lapsed, but this is a matter of state law.

It would appear that the individual for whom the contribution is made must not be any older than 18. Thus, the contribution must be made on or before the date the individual attains age 18. Even though a prior years' contribution can be made by the tax filing date (not including extensions), and is deemed to have been made on th last day of the preceeding year, Code Section 530(B)(A)(ii) prohibits the trustee/custodian from accepting the contribution after the 18th birthday.

Bob, If you only need one set of numbers run, please provide me with the 2001 pre-plan EI of each owners and the W-2 wages of each non-owner. I'll also need to know in respect to owners whether there is any self-employment g/l from unrelated entities and any W-2 income for that owner. Also please indicate how much is desired to be spent or if your looking for a 15% contribution. If integrated, please specify the integration level.

Since the defined benefit plan was terminated, the model (or prototype) forms may be used to establish a SEP. Form 5305-SEP provides as follows. Note, the words "Currently maintain." When not to use Form 5305-SEP. Do not use this form if you: 1. Currently maintain any other qualified retirement plan. This does not prevent you from maintaining another SEP. 2. Have any eligible employees for whom IRAs have not been established. 3. Use the services of leased employees (described in section 414(n)). 4. Are a member of an affiliated service group (described in section 414(m)), a controlled group of corporations (described in section 414(B)), or trades or businesses under common control (described in sections 414© and 414(o)), unless all eligible employees of all the members of such groups, trades, or businesses participate in the SEP. 5. Will not pay the cost of the SEP contributions. Do not use Form 5305-SEP for a SEP that provides for elective employee contributions even if the contributions are made under a salary reduction agreement. ......

Since the calculations are iterative, software is required when the non-owner contribution rate/amount is not known. This is generally the case, since the percentage needed for the owner can't be determined until after the non-owner percentage determined. See QP-SEP Illustrator in the software area of BenefitsLink. GO TO http://www.BenefitsLink.com/GSL/index.html

A SIMPLE 401(k) may be changed back to a traditional 401(k), but not any earlier than the first day of the next plan year.