Gary Lesser

See the brother-sister controlled group rules under Code Section 1563(a)(2) available on B/L. If you own (directly or indirectly) 50 percent or less, then the sole-proprietorship may maintain a qualifed retirment plan, SEP, or SIMPLE-IRA without covering employees of the other business (based only on the $20,000). If you do, your deduction for an IRA contribution may be phased-out or eliminated, which happens when an individual and/or his or her spouse is an "active participant" and modified AGI exceeds certain levels.

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. Also the 15 day rule for a SIMPLE IRA is NOT a safe harbor if segregation could occur earlier. 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. On December 31, 1999, 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, 2000, the extended due date of Able-7's 1999 return.

After two years you can treat the SIMPLE IRA as an IRA for rollover purposes. You can do a trustee-to-trustee transfer (IRA to IRA) or receive the assets and within 60 days place the same assets in another IRA (traditional) or SIMPLE IRA. The direct transfer has the benefit of simplicity and things are less likely to go wrong. If cash were distributed you could play with it for 59-9/10 days before rollong it over. If non-cash property, then it is best to do the direct transfer. BUT either way is okay.

The Notice (98-4) was contained in the Internal Revenue Bulletin (1998-2 IRB 25) and can be looked at or downloaded. It is located at the following address-- http://ftp.fedworld.gov/pub/irs-irbs/irb98-02.pdf You'll need Adobe Acrobat reader to view file. Once downloaded, just right click on it in your file manager and it should open (assuming you have the Acrobat reader, which can be gotten at no charge if you don't have from Adobe; or just search for it within B/L)

The matching contribution does not have to be made until the due date of the employer's Federal income tax return. The cites are the IRS Notices contained in my prior message. If the employer chooses, it can make a dollar-for-dollar match until the 3% limit is reached. That being said, a problem could result if the employee quits and the match was based on annualized salary. So that this doesn't occur, the "ongoing" match can be limited to 3% of compensation actually paid to the date that the match is computed. It is easier (and best) to wait until the year is over.

The provider of the legal advice is operating under a misapprehension. The employee can defer up to 100% of the amount they would have received in cash (after making the election), but not more than the $6,000 limit. The employer may NOT place any restrictions on this amount "(e.g., by limiting the contribution percentage)" other than to comply with the annual limit. [Notice 98-4, Question and Answer D-2] The 3% is the LIMIT on the match. The match is 100% of what the employee elects to contribute. It does not appear that the employer has a valid SIMPLE IRA if it limits contributions to 3% of pay. The 3% limit is based on compensation for the "entire calendar year." [see Q&A D-4]

I agree. And incidently, Barry Picker is such a pro.

Okay. If either plan is integrated you will probably need software, available on BenefitsLink at: http://www.benefitslink.com/GSL/QPSEP_profile.html to crunch the number unless you know what the percentage going to the non-owner(s)is. If you're trying to give owner a specified amount or percentage (eg 25%) then you don't know what the formula is that gets him/her there; hence you don't know what the percentage is for nonowners (and can't compute SE tax). Once you know the nonowner amount/percentage, then you can figure owner's SE tax (if there are g/l from unrelated entities or any W-2 income that needs to be taken into account for SE). Then subtract 1/2 of it from owner's pre-plan income (along with the nonowner contribution), then use equivalency percentage (25 = 20 etc) to arrive at owner's contribution. To start, treat both plans as one (add formulas together, even if integrated). When you get ultra net EI, then apply it to the MP plan formula exactly as the formula reads, what's left goes into the SEP. It is easier with software (and is handles the same way, except that the math is instantaneous and you don't have to compute SE tax; it's done on the fly)!!

Compensation does not include amounts deferred under a Section 125 plan. [see SIMPLE LRM--Listing of Required Modifications and Information Release Package, Section 6-7. Notice 98-4, C-4 states: "For purposes of the SIMPLE IRA Plan rules, in the case of an individual who is not a self-employed individual, compensation means the amount described in section 6051(a)(3) (wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a)), and amounts described in section 6051(a)(8), including elective contributions made under a SIMPLE IRA Plan, and compensation deferred under a section 457 plan. For purposes of applying the 100-employee limitation, and in determining whether an employee is eligible to participate in a SIMPLE IRA Plan (i.e., whether the employee had $5,000 in compensation for any 2 preceding years), an employee's compensation also includes the employee's elective deferrals under a section 401(k) plan, a salary reduction SEP and a section 403(B) annuity contract." This differs somewhat from the definition contained in the 1994 See SIMPLE LRM--Listing of Required Modifications and Information Release Package (see Section 7)which allows compensation under a Section 125 plan to be included. That being said, the Note to reviewer provides that it "is optional." Thus, it does not have to be included. So where does that leave you? You must check the document's definition. Model documents do not include 125 deferrals. Hope this helps, Gary.

I'd like to know why all employees of the controlled group aren't being treated as if employed by a single employer (and certainly covered in the SEP, including the owner)? In the case of the MPPP are any employees of the non-adopting entity being disregarded, and why (under what theory)? Is the hotel and the motel one and the same entity? What is the percentage contribution rate specified in the MPPP? If both entities are participating in the PLANS, then the loss reduces the EI for plan purposes. If not, the loss affects the 1/2 of social security tax deduction; and hence, earned income for plan purposes. This is as far as I can go with this unusual fact pattern.

First, with the help of some of my friends, think that the employees of the mergering/acquiring entity are being disregarded with respect to the multiple plan rule. If you look at the legislative history and similar rulings this would be true. So my answer is no, the employees of the original SIMPLE IRA could not participate in the 401(k). There may also be a problem in not covering all eligibles in the SIMPLE, if that is done.

Possibly. For purposes of determining eligibility to make an Education IRA contribution, MAGI is an individual's adjusted gross income (AGI) from his or her federal income tax return with certain modifications. For most taxpayers, MAGI will be the same as AGI. The modifications made to AGI are slightly different for the Education IRA than those for the traditional IRA or the Roth IRA. For the Education IRA income limits, an individual's AGI must be increased by the following exclusions: 1. Foreign earned income of U.S. citizens or residents living abroad; 2. Housing costs of U.S. citizens or residents living abroad; and 3. Income from sources within a. Puerto Rico b. Guam c. American Samoa, and d. The Northern Mariana Islands. [iRC § 530©(2); see also IRS Pub 970, Tax Benefits for Higher Education (Feb 1998).] IMO, if personal service income is shown (not excluded)on Form 1040, then the compensation could be used as the basis for a traditional IRA contribution.[Edited by Gary Lesser on 09-14-2000 at 02:39 PM]

Possibly. See PLR 200032044 The IRS allowed a widow may roll over the proceeds from her deceased husband's IRA and section 403(B) annuity into her own IRA tax-free. The husband designated his estate as the beneficiary of his IRA. On his death, his widow became the estate's sole executor and a residuary beneficiary with the power to allocate estate assets. The widow wanted to allocate both the IRA and the annuity to her residuary interest and roll the proceeds over into an IRA in her name. Because the widow had control over allocation of estate assets, the IRS ruled that she could roll over the proceeds from the husband's IRA to her own tax-free.

The stock can be rolled over into a traditional IRA and then the traditional IRA can be converted into a Roth IRA. The NUA belongs to each share and cannot be separated from the certificate, thus any distribution of the employer securities from the IRA (or upon conversion into a Roth)will subject the stock to taxation at its FMV (thus loosing any NUA treatment that might have been available had the stock been distributed from the 401(k) plan and not rolled over). If the shares are rolled over into an IRA, then there is no tax to pay (and the NUA is lost forever). FWIW, you cannot withhold stock having a FMV equal to the total NUA and rollover the balance of the shares and other property.

I agree with Bill but wish to add that some state's debtor-creditor laws treat traditional IRAs diferently than IRA-based plans (SEP-IRAs, SIMPLE IRAs, Ed IRAs and Roth IRAs). Nealy all states grant exemptions for traditional IRAs (except NH, unlear in DC, IA, MS, NM, & WY). SEP IRAs and SIMPLE IRAs are not exempt in NH, unclear in DC, IA, MS, NM, NY (but SIMPLE IRA is exempt in NY), and WY). Hope this helps.

A traditional 401(k) plan could be used if NOT top heavy. If the employer would contribute 3 percent (in some years 2 percent) then a SIMPLE might work well. In fact the cost of maintaining the 401(k) plan might exceeed the cost of employer contributions under the SIMPLE!!

If it is indeed a partnership for federal income taxes, then the net of all line 15 amounts may be used as EI (subject to adjustments). In most cases, the W-2 income is not proper reporting (but it is done by a fare number of employers). OTOH, only W-2 wages are used in the case of a S corporation. In the case of a SEP, Sched C of F earned income is considered in the calculation of an owner's plan compensation. How it is determined in the case of a SIMPLE is unknown and without any IRS guidance. Riddle and Eggs![Edited by Gary Lesser on 09-01-2000 at 09:34 AM]

You are correct, but do understand that the term self-employment income is determined after the employee's wages, FICA, and other expenses are deducted) to arrve at "botton line" EI. After that, in determining NESE under the SIMPLE plan, only .9235 percent is used according to the IRS.

Unless the separate property rules apply, the employees of the wife's business (including the wife) would have to share in any SEP contributions. HOWEVER, such an agreement (for separate property status) should no be considered unless separate representation is used, even in a friendly separation. In CA, such an agreement is potentially invalid unless there is separate counsel. See Derrin Watson, "Who Is The Employer" (1998) at Page 212, Q&A 7:17. It is, by far, the finest book ever written on the subject and even foretells the future. To order the book, send an e-mail to Derrin and ask for information. His e-mail address is: mom@pixpc.com.

And possibly being reported as taxable distributions by the distributinhg trustee or custodian. Something to explain away if it occurs. No IRS guidance issued on treating the amount as "wages," but I think it is the only action the employer could take to avoid the 10 percent penalty for nondeductible contributions.

You can roll it over (or transfer it) ONLY to another SIMPLE IRA without waiting for the two years to expire (and gain more investment options). There may be fees for selling, liquidating (and so on) existing assets and/or IRA transfer charges to consider. There may be other options if the employer uses a designated financial institution. Many financial institutions have SIMPLE IRA plans. Assuming the employer does not use a DFI any SIMPLE IRA can be used for ongoing contributions. In some cases, although fees, commissions, and charges are higher, a brokerage account can be offered as an investment vehicle as well.

You are correct; contributions from all sources cannot exceed earned income (assuming one borrows from the qualifed defined contribution rules under Code Section 404(a))8)©, which of course, do not directly apply to a SIMPLE plan). I do endorse the "recharacterization approach" for EI amounts of $6,180 or below. The IRS has not issued any guidance, however, in this matter. In addition, nondeductible contributions may be subjecrt to additional penalties. Hope this helps...Gary

If benefits are accrued or contributions are made to a qualified plan during any part of the SIMPLE IRA year (always a CY) then the SIMPLE becomes a "complex". Thus, a short PY (within the CY) will not work. [iRC 408(p)(2)(D)] The only exception is if the employees under the SIMPLE are not eligible to participate in the qualified plan because of IRC 410(B)(3).

If you meant to cite "501©(3)" the business may establish a SIMPLE in IRA form, or in the form of a 401(k) SIMPLE. [Notice 98-4, B-4; Notice 97-6, B-4. Gov't employers, however, may not establish a qualified SIMPLE plan under a 401(k) arrangement.

Agreed. Assuming the businesses aren't related/controlled/affiliated a separate 415 limit applies.