Gary Lesser

A SEP (model or prototype) may be used by an employer that does not currently maintains any other qualified retirement plan.

Yes, contributions for non owners reduce the pre-plan EI amount, and affects the 1/2 reduction for Self-Employemnt Tax. And the owners contribution (generally an unknown) must also be considered to arrive at plan compensation. W-2 income (if any is earned by the SE) must also be considered, as well as any SE g/l from unrelated entities. The math is circular and interdependant, but inexpensive software is available. You might wish to check out "QP-SEP Illustrator" in the software section of BenefitsLink.

~~~Reposted by Popular Demand~~~ re: IRC 402(h) Exclusion Limit under EGTRRA 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: (a) 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). (B) Strike the remainder of Code Section 402(h)(2)(B). © 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. ~~~Reposted by Popular Demand~~~

In general, the SEP IRA assets may be converted into a Roth IRA. Ongoing employer contributions can not go directly into a Roth. SARSEP amounts for the current year can not be distributed until the employer has made a determination that the 125% rule has not been violated, or March 15, whichever comes first. Some would argue that the 125% test only affects HCE, but the model notice restricts all employees from distributing those contributions, the instructions, however, seem to restrict distributions from being made to HCEs only (go figure).

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.

Yes, but only after the 2-year period has expired in the case of a SIMPLE IRA.

Only an employer can establish a SEP. The employee is already covered by the existing SEP if they othrwise qualify, but must open an IRA to receive any contributions.

re: IRC 402(h) Exclusion Limit under EGTRRA 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: (a) 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). (B) Strike the remainder of Code Section 402(h)(2)(B). © 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.

The existing SEP can be adopted (signed) by the new employer. The sponsor of the document should be made aware of what is happening. They may even have a form for the adoption by the new entity. There are many factors which determine the better plan. If the need of the employer, for example, is to exclude people not in their 4th service year, a SEP is better. OTOH, if those people complete less than 1,000 hours of service in a 12 month period (generally from date of hire and in plan years thereafter) they would likewise be excluded. More money can be placed in a P/S plan than a SEP. Perhaps, you can ask the CPA why he believes one is better than the other for this client. Also, SEPs do not receive adequate creditor protection in all states. If simplification and lack of burdensome administration is desired, then think SEP and SIMPLE.

At last, we all agree.

I still agree with myself. Matching contributions under a SIMPLE are NOT subject to the compensation cap ($200,000 for 2002). I do not expect that a TC will be forthcomming to change the existing rules regarding matching contributions. [Nor do I expect any change under 402(h) regarding SEP exclusions - see post entitled IRC 402(h) Exclusions Limits under EGTRRA.] If the employer has to match a $7,500 contribution ($7,000 plus catch-up of $500 for 2002), then $250,000 of compensation would be reguired to get a match of $7,500 with a 3% matching formula. If self-employed, $270,709.25 of pre-plan compensation would be required ($270,709.25 x .9235 x .03).

I remain extremely comfortable that a SEP or SIMPLE is not a sucessor plan for 401(k) termination purposes.

Keep in ind that elective contributions from this traditionl IRA (SEP) may not be rolled over to another traditional IRA until after a determination has been made that the 125% test has not been exceeded, or if earlier, March 15, following the end of the plan year.

(1) SCP is not available to correct egregious failures. For example, if an employer has consistently covered only highly compensated employees under a plan, or if contributions for the HCs were made over the §415 limit, these failures would be considered to be egregious. Egregious failures may be corrected under VCP. SEPs are eligible to submit corrections under the following programs only - VCP (the special VCSEP procedure), SCP and Audit CAP. (2) Here, the owner would have participated had a 3 year reqiuirement been adopted when the plan was originally established. The plan could have been amended (before 2000 - had the error been discovered at that time) to provide a 3 year requirement. Bad advice, bad results!

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: (a) 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). (B) Strike the remainder of Code Section 402(h)(2)(B). © 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.

The failure to remit timely may result in a prohibited transaction, but would not necessarily disqualify the plan. Special rules regarding the forwarding of elective contributions by Partners whose EI is frequently determined after the end of the year may also apply (it is unclear whether a sole-proprietor would fiti nto this situation). See Preamble to the 401(k) regulations regarding comments received about Partnerships where the earned income of a partner can not be determined until several months aftr the end of the year. The election to defer, however, must be in place by the end of the year. There is no 30-day safe-harbor rule. The deferrals must be deposited as soon as they can reasonably be segregated from the employer's general assets. but not later than 30 days.....

Elective SEP contributiuons (within IRC 402(g) limits) may not be withdrawn before the _earlier_ of the determination date or March 15 following the end of the plan year, otherwise they will be subject to a 10% penalty, regardless of whether any other exception applies. [iRC Sec. 408(d)(7)(A)]

Except for the nonelective contribution of 2%, there is no compensation cap on the matching contribution (generally 3%) . See IRC Sec. 408(p)(2)(B)(ii). Thus, $233,333.33 of compensation would be required to match entirely a $7,000 contribution for 2002.

The excess amount is reported on Form W-2 in Box 1 (or treated as EI if self-employed). The amount is subject to FICA and FUTA (unless already considered for that purpose). The full amount of the elective contributions (including the excess is reported in Box 13, unless self-emplyed). The excess amount, plus any gain thereon, should be removed by the due date of the Federal income tax return. The gain is taxable in the year of the deferral and may be subject to a 10% penalty if under age 59-1/2, unless an exception appies.

If living in a community property state there are some possible exceptions that (if available) would eliminate the controlled group status between H & W. In general the H & W must agree that their businesses are separate property and there is no other cause for attribution (e.g., minor children). An ERISA attorney should be consulted because there are other non-pension issues that must be considered.

Only to extent treated as wages and reported in Box 1.

Generally yes. But special rules do not allow for SIMPLE-IRA rollovers during the 2 year hold period and for SARSEP contributions distributed before the employers determination that the ADP test is satisfied. Direct transfers, are however, permitted during this period in the case of a SIMPLE-IRA.

The employer can act as an agent of the employee and make contributions to a Roth or Traditional IRA establisherd by the employee. The amount (contribution) is treated as "wages" for all purposes. It is not an employer pension expense and is deducted by the employer as "wages."

The wife is a potential participant in the qualified plan and the SEP needs to be adopted by both entities (otherwise none of the SEP contributions are permissible (assuming other employees or husband are eligible).

More information is needed. Please specify compensation and exactly what limit was exceeded (e.g., 125% rule, 15% limit, and so on).