Gary Lesser

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. Thus, the elective amount, in the case of a self-employed individual, may be contributed after the end of the year. 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 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 situation. Example. The Able-7 Partnership maintains a SARSEP (same result if SIMPLE-IRA). On December 31, 2000, 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, 2001, the extended due date of Able-7's 1999 return. Hope this helps.

The regulations under Code Section 408 require (and allow) an employer to establish the IRA (and sign any documents) on behalf of the participant so that the contribution can be made.

It is possible to receive more than $25,500 BUT VERY UNLIKELY. Reason: Code Section 402(h) does not provide for a maximum compensation cap. However, all integrated PROTOTYPE plans (that I am aware of) plans provide for a maximum allocation of 15 percent of the current compensation limit ($170,000); and plan provisions must be followed. An individually designed plan would not be required to have such a provision (which is required under the LRMs for a prototype). Getting a PLR is, of course, essential. Nonetheless there is a maximum provided under Code Section 402(h). That maximum would reduce the $30,000 limit (now $35,000) by the plans integration level (assume $80,400) by the integration pread (assume 5.7%). Thus, $30,417.20 would be the maximum that could be allocated under an individually designed integrated SEP (for 2001). For this result to occur, the employer would have to have several (oftentimes many)lower paid employees. If the employer contributed 15 percent of compensation (limited to $170,000 for deductioin purposes), that amount could get allocated in an integrated fashion. Amounts allocated in excess of $30,417 (assuming the TWB and 5.7% spread were used) would be included in the participants income. Thus, the plan should be designed to provide the highest paid (owner) individual with a contribution of $30,417.20. The contribution percentage would then be 15% (maximum) or less. Hope this helps. If you have the SIMPLE, SEP, and SARSEP Answer Book, see Q 11:5 (6th Edition).

No. The "current year method" is the only method for SARSEP ADP testing.

The best way would be to treat the amount as excess elective contributions since that is what they were (arguably in box 1 of Form W-2, but not in box 13). A notice to affected employees would be nice (and telling them to remove the excess and the pre- and post- due date penalty rules, and that it was taxable in 2000 (for this year's portion)). The employees could use the notice when requesting a correcting distribution from the trustee / custodian of the IRA. THEN, make contribution with new funds. THIS WAY AVOIDS ALLOCATION PROBLEMS AND AVOIDS PLAN ADOPTION AND CONTRIBUTION ISSUES, AS WELL AS IRA TRUSTEE CODING ISSUES.

The DC limit for 2001 is $35,000. Thus, the maximum statutory reduction of $4,582.80 ($80,400 x 5.7%) does not cause the DC limit to be exceeded; that is, $25,500 is less than $35,000 reduced by $4,582.80.

The salary deferrals were not validly deferred thus they are "wages" for the taxable year and should be treated as W-2 income. [A SIMPLE IRA can only defer compensation earned after the effective date of a valid SIMPLE IRA election form; thus it is too late for this approach.] On the other hand and assuming a valid SEP, the amounts could arguably be claimed as SEP contributions. [if there was a SEP, the amounts are not excess SEP contributions (if within the 15% individual and 15% employer limits). They can't be treated as excess SARSEP contributions since no such plan ever existed.] This still leaves open the matter of the employees being owed an amount of wages equal to the amount they each deferred AND the possibility of unequal allocations being made to the plan because of the 10% matching contribution (not allowed in a SEP) and different deferral percentages or amounts. Plan eligibility may also have to be rethunk! Looks like the employer will need some software (like QP-SEP Illustrator). Is the plan integrated too, is there a document???

An eligible employee can not elect out of the 2 percent nonelective contribution under a SIMPLE IRA. The employer must open the SIMPLE IRA in behalf of the employee if the employee is unwilling or cannot be located.

A SIMPLE could be established for the common-law-employees and a deductible loss created! Since the owner has no compensation, no owner contribution is allowed.

THE 2001 LIMIT FOR SIMPLE PLANS IS $6,500. Thus, with sufficient income, a $13,000 contribution is possible in a SIMPLE IRA ($9,900 in the case of a 2% nonelective contribution because of the $170K compensation cap). In a SIMPLE 401(k), the $170,000 compensation cap always applies (as does the 25% limit); thus, $11,600 is the maximum (with 3% match) and $9,900 in the case of a (2%) nonelective.

Probably, assuming no indirect ownership and the businesses aren't part of an affiliated service group (e.g., situations were services are provided to the other entity). If so, have your CPA look at IRC Section 414(m). Agin, your IRA contributions may not be deductible in their entirety (see above answers).

A "model" plan can NOT be used by an employer that maintains a qualified plan, but a prototype may generally be used (since they rarely contain such a limitation; but sometimes they do!). Note that the qualified plan MUST contain coordination requirments if it is to be used with a SEP (rev Proc 87-50, Section 5.05). See, to, LRM for DC plans. Yes, yhe 402(g) limit does apply in the aggregate.

The 2001 limit is $6,500.

The employee can treat up to $2,000 as a traditional IRA contribution if they were deemed to have made it. If the excesses are included on form W-2 (as amended), then the employer would be off the hook (IMO) for the 10% penalty and the employee would have been deemed to have made the contributions into the IRA. Obviously, it is too late to withhold income taxes. Insofar as FICA and FUTA relating to any pure employer contributions, see, e.g., IRC 3121(a)(5).

The rule is 50% of the employees eligible to participate. Thus, it would appear that the rule must be satisfied as of the end of the year, but based on the highest number of eligible employees fot that year. There is no minimum amount required, thus a $1 elective contribution would appear to be okay (and count that employee as having participated).

If a self-employed individual earns exactly $6,000, IMO the elective portion and the match/nonelective can not exceed $6,000 (recharacterization). Thus, the elective portion is limited to $5,825.24 ($6k/1.03)in the case of a 3% match ($174.75). The 2001 limit is $6,500.

".....Plus the a sole propreitor's income for a simple IRA is based on all of the business subject to SE tax not just the business that established the business." I don't entirely agree with the above statement unless the businesses/employers are treated as one employer under Code Section 414. For example, earned income from an unrelated partnership can not be counted (see following). While there is no cite directly on point and IRS guidance seems to suggest that you may be right (and Code Section 401© does not apply), I do not feel that ALL earned income can be counted. I also feel that an individual that files long schedule SE can also have a SIMPLE (but may have to adjust NESE if there are unrelated gains/losses or if there is W-2 income involved). Agin, the rules and the law is not all that clear and future "clarifications" may be enacted (as of the date the law became effective). Thus, I'd excercise some caution or get a PLR. If you have any additional info on this point, please share it with us.

Is the new employer only benefiting "old" employees under the SARSEP? If so, how are they excluding the other employees from the SARSEP? I am of the opinion that the SARSEP DIED unless the old business is the legal predecessor under state law. Assuming only the assets were purchased, I think the SARSEP to be undone in respect to the "new" contributions and a 10% penalty paid by the new employer. However, we don;t have any regs on the definition of sucessor employer under section 414(a). Grey area! Conservatively I think the SARSEP did in fact die! Also, see my reply to message entitled "Excess matching contribution in SIMPLE IRA."

Is the new employer only benefiting "old" employees under the SARSEP? If so, how are they excluding the other employees from the SARSEP? I am of the opinion that the SARSEP DIED unless the old business is the legal predecessor under state law. Assuming only the assets were purchased, I think the SARSEP to be undone in respect to the "new" contributions and a 10% penalty paid by the new employer. However, we don;t have any regs on the definition of sucessor employer under section 414(a). Grey area! Conservatively I think the SARSEP did in fact die! Also, see my reply to message entitled "Excess matching contribution in SIMPLE IRA."

You can always request that the penalty be abated for the reasons you stated. Didn't the IRA trustee/custodial provide you with a disclosure notice that contained information about the holding period and penalties(?).

Yes, they apply. However, a director is not a service provider; thus he/she is not part of an affiliated service group. Also, absent attribution, however, IRC Sections 414(B) and 414© would not seem to apply to this less than 50% shareholder.

Treatment of excess elective deferrals When contributions are made in excess of the amounts permitted, or when an employer does not qualify to establish or maintain a SIMPLE plan an excess contribution is created. For example, what happens if the employer has an existing SIMPLE IRA in calendar year 2000 which has been funded and then adopts a defined benefit plan for the year, an overlapping year, or has a short plan year falling within that calendar year? Generally, an employer cannot make contributions under a SIMPLE IRA Plan for a calendar year if the employer, or a predecessor employer, maintains a qualified plan (other than the SIMPLE IRA Plan) under which any of its employees receives an allocation of contributions (in the case of a defined contribution plan) or has an increase in a benefit accrued or treated as an accrued benefit under Code Section 411(d)(6) (in the case of a defined benefit plan) for any plan year beginning or ending in that calendar year. (In applying these rules, transfers, rollovers or forfeitures are disregarded, except to the extent forfeitures replace otherwise required contributions.) However, an employer can make contributions under a SIMPLE IRA Plan for a calendar year even though it maintains another employer-sponsored plan when that other plan covers employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining and the SIMPLE IRA Plan excludes these employees and under the grace period rules (when there is an acquisition, disposition, or other similar transaction). In most cases, the adoption of a defined benefit plan would cause the SIMPLE IRA contributions for such year to become excess contributions. The SIMPLE rules are silent with respect to any required notification to employees that the SIMPLE IRA is, effectively, being discontinued for such year. It would seem prudent, however, to inform the employees that contributions under the SIMPLE plan are “excess” contributions and will be reflected on Form W-2 (see below). It would also seem prudent to inform the employees of the amounts that should be withdrawn (or recharacterized to a traditional IRA) with any gain thereon before the due date of the employee’s Federal income tax return and the effect of doing so and of removing the excess amount after the due date of the return. Arguably, if no contributions have been made for such year the plan could be terminated, otherwise any amendment to a SIMPLE plan can only be effective at the beginning of a calendar year and must conform to the content of the plan notice for that calendar year. With only one exception, none of the rules or guidance issued to date suggests how the excess is treated, nor specify any available correction method. Since excess contributions are not deductible, the employer may be subject to a 10 percent penalty tax unless corrected. The correction methods applicable to qualified plans do not seem to apply or are inadequate for SIMPLE plan purposes because the employer has no control over the SIMPLE IRA, which belongs to the employee. Neither can excess amounts be used by the employee as a traditional IRA contribution because such contributions must be made to a traditional IRA (which term does not include a SIMPLE IRA). It would seem that the regular IRA excess contribution rules would apply to the employee since a simple retirement account is "an individual retirement plan (as defined in section 7701(a)(3)..." which must also meet additional rules. Without formal guidance regarding the correction of excess contributions under a SIMPLE IRA, many financial organizations will not make a corrective distribution. Instead, they consider any withdrawal as an age-based distribution taxable when withdrawn and subject to the 25 percent tax penalty (unless an exception applies). These organization suggest that either the money should be left in the account (apparently they do not feel the 6 percent excise tax under Code Section 4973 is an issue or the 10% penalty tax on the employer under Code Section 4972) or taken out and be subject to normal withdrawal taxes and penalty rules. Such amounts are also treated as taxable distributions when withdrawn. IRS spokespeople have even said that a contribution of a penny more than is allowable would invalidate the entire program, a result not likely to be sustained in a court of competent jurisdiction. Then again, anything is possible. Specific Instruction for Form W-2 (2000), box 13, relating to 401(k) plan excesses, provide that the entire elective contribution is reported in box 13. The instructions specifically state, "The excess is not reported in box 1." [Emphasis added.] On the other hand, the back of Form W-2, Instructions (for completing box 13) states the following when using Code S: "Employee salary reduction contributions under a section 408(p) SIMPLE (not included in box 1)." Arguably, excess contributions under a SIMPLE are to be reported in box 1, 3, and 5, but should not be reflected in box 13. This approach would also seem to eliminate any employer penalty relating to nondeductible contributions by turning those amounts into "wages" (and consequently, personal contributions made by the employee). Since traditional IRA contributions are not permitted to be made into a SIMPLE IRA, the employee should remove the entire amount in accordance with the general rules for removing excess IRA contributions under Code Sections 408(d)(4) and 408(d)(5). This approach would also seem to eliminate the distinction between excess employer contributions and excess employee contributions, but leaves open the issue of income tax withholding, FICA, and FUTA. The employee would also have to explain why the amount shown on Form 5498 issued by the trustee or custodian should not be subject to tax (having also been reflected in box 1 of Form W-2). Distributions of gain, may however, be subject to the 10% or 25% tax,unless an exception applies. A distribution of excess IRA contributions, made within the time for filing the individual's tax return for the year in which an excess IRA contribution occurs, is not included in gross income nor subject to the penalty tax, provided that the interest or other income that was earned on the excess IRA contribution is also withdrawn. The interest or other income attributable to the distribution is taxable in the year that the contribution was made and is subject to the premature distribution penalty tax if the participant is under age 59½ (unless another exception applies). If the excess IRA contributions are withdrawn after the due date of the individual's tax return, the excess amount is not includible in income, regardless of whether the interest or other income earned on the excess contribution is also withdrawn. The $2,000 limit applicable to corrective IRA distributions made after the due date of the return is increased by the amount of the Code Section 415 dollar limit (currently $30,000) or the amount of the SEP contributions if less; no increase, however, is provided for excesses that originated under a SIMPLE plan returned after the due date. Excess IRA contributions are subject to a 6 percent tax for each year that the excess remains in the IRA. The tax, however, cannot be more than 6 percent of the value of the IRA determined as of the end of the year. Excess IRA contributions should be removed. The excise tax is reported by the individual in Part II of Form 5329. Individuals report the 10 percent premature distribution penalty tax in Part I of Form 5329. Also see Publication 590 for a discussion of exceptions to the age 59½ rule. Excess IRA contributions (including any gain thereon) can also be recharacterized (treated as if contributed to a traditional IRA or Roth IRA), but this would only provide a remedy for amounts not in excess of $2,000, at best. It could be argued, however, that an excess should be treated in the same manner as under a SEP. Under a SEP, contributions in excess of 15 percent of an individuals taxable compensation are includible in income and reported by the employer on Form W-2 as "wages" under Code Section 402(h). No comparable provision applies in the case of a SIMPLE, nor does the 15 percent of compensation limitation apply. Excess salary reduction contributions under a SARSEP are subject to special notification and timing rules, which in some cases treat the amount as an excess only after the notification is provided to the employee. In some cases, the entire arrangement is invalidated if no notification is provided. As previously stated, there are no notification requirements applicable to excesses under a SIMPLE plan. It seems evident that the IRS is hesitant to address this issue and other issues relating to the proper administration of the tax laws relating to distributions and the correction of excess contributions. Perhaps this is so because the Code does not explicity provide a remedy in Code Section 408(p). Even if the IRA rules apply to excesses, there remains issues and questions that would need to be resolved. Upon the payment of a substantial user fee, it might be possible to get an answer by requesting a private letter ruling (PLR). It appears as though the IRS does not believe that this is a recurring problem. But clearly, after four years, the IRS could have provided some guidance. The making of excess contributions, regardless of the cause, may turn a SIMPLE IRA Plan into a “COMPLEX”! Hope this helps.

Absolutely. The S-Corp can use a model or prototype SEP. However, only wages reported on Form W-2 can be used. Dividends, if any, reported on Schedule K, are not treated as compensation.

There is nothing on point (law or other guidance). If one were, however, to borrow from the qualified plan nondiscrimation rule; then the answer would be yes, PROVIDED the prohibited group members could have met the plan's eligibility requirment (after the amendment) at the time the plan was originally established. Thus, a new business that establishes a SEP with a O-year service requirement could not ordinarily increase the requirement to one year (called "rolling eligibility") if any recently hired employees (other than prohibited group members) would be excluded as a result of the amendment. Assume an individual purchases a new business established in the prior year and adopts a SEP with a 1-year service requirement (thus the owner is ineligible). The owner could probably amend the plan for the current year to 0 years, thus allowing greater participation (since doing so would not result in discrimination, although the owner is the only new participant, and recently hired employees are not excluded). aaSSUME ONE OWNER THAT

SEP-IRA assets may not be rolled over or transfered to a qualified plan. Although a SEP-IRA may be a trust, the trust in not of the type described in 401(a), that is, a qualified plan. Thus, a rollover or transfer ONLY to another IRA (or SEP-IRA if allowed by the sponsor) is permitted.