Gary Lesser

The 3% limit is based on compensation "for the year." [see IRC 401(k)(11)(B)(i)(III)]

See my responses: 1) I have excess ADP amounts for a SARSEP year ended 06/30/00. We must notify paricipants no later than 8/15/00 to avoid the 10% excise. Are these includible in their income for 1999 since this is the earliest that these amounts could have been deferred? IMO, the amounts are treated as wages for the C.Y. year in which the plan year ends (when the ADP is determined), to wit, 2000. 2) I also have an individual that exceeds the 15% of compensation limit based on plan year end 06/30/00. EMPLOYER DEDUCTIONS. The computation period for determining the employer's deduction under Code Section 404 is: (but see employee inclusion later) • The amount that may be deducted by the employer for any calendar plan year may not exceed 15 percent of the includible taxable compensation paid to eligible employees during the calendar year. • If the employer's taxable year is not the calendar year, then for deduction purposes, compensation paid to eligible employees during the calendar year ending within in the employer's taxable year is used. [iRC § 404(h)(1)©; see (h)(1)(A) for the timing of the employer's deduction] EXCLUSION BY EMPLOYEE — IRC § 402(h): Contributions by employers are excluded from the gross income of an employee to the extent that the contribution does not exceed the lesser of: ♦ 15 percent of includible taxable compensation without regard to the SEP contribution, or ♦ Up to $30,000 (as adjusted, see example 2 if integrated) per participant. The computation period for determining how much of a SEP contribution may be excluded from income appears to be the 415 limitation year under Code Section 402(h). [see IRC 415(j) and Reg Section 1.415-2(B)] Unless an election is made, the limitation year is the CY. Most employers elect to use the PY as the limitation year. Hope this helps. Gary

The SIMPE IRA plan would seem to be invalidated. See other responses in this forum.

A DB CAN be started. If any accrual of benefits is provided for the year, then the SIMPLE IRA is invalidated and the SIMPLE IRA contributions become an excess contribution. The employee should remove them before the due date of their Federal Income Tax Return to avoid additional penalties (6%). The trustee will, in most likelyhood report any distribution as a taxable distributions (and possibly subject to the 25% penalty). There is also an employer issue: the making of nondeductible contributions. The IRS is silent in this regard. IMO the employer should treat the amount as wages. Arguably, the amounts are not subject to FICA or FUTA. The employee will have to explain why the amounts are not taxable twice (leaving only the gain subject to tax and a possible 25% penalty). {2015 - Updated below, there is no correction available under the Code and no 6% penalty either. Correction allowed under the EPCRS)

If the employee refuses to establish a new SIMPLE IRA, then the employer could establish one on the employee's behalf. The organization is within its rights not to accept a contribution for a closed account.

I'd seek a PLR if the acquiring entity did not have a SARSEP. To state otherwise, would make businesses with grandfathered SARSEPs more valuable. I'd apply the same reasoning to an entity that became controlled, related, or affiliated with an entity that had a grandfathered SARSEP.

An employer can not move existing assets, they belong solely to the participants. With new documentation, however, future contributions could be placed with a new entity, provided, of course, that the participants establish SEP/SARSEP-IRAs with that entity.

As long as the draw turns out to be earned income (i.e., not a loss for the year) a contribution can be made. The match + contribution cannot exceed the earned income amount. For example, if a self-employed earns exactly $6000, then the elective amount cannot exceed $5825.24; the 3% match is $174.75.

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 (see following discussion which should apply equally to all types of SIMPLE plans). 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. 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.

A SIMPLE IRA is NOT a successor plan. [under the 1998 updates to the 401(k) Listing of Required Modifications (LRM), the IRS added SIMPLE IRAs to the list of plans that should not be considered a "replacement plan." [LRM for CODA Master or Prototype Plans, § XVI (Distribution Requirements)]

Yes, a SIMPLE IRA may be established by a tax-exempt employer. [Notice 98-4, B-4]

According the the LRMs, any amendment to the plan becomes effective as of the beginning of the year AND must conform to the content of the plan notice for the year. Thus, I do not believe that an employer can discontinue the plan or accepting elective deferrals once it has started for a year.

Treat the excess portions as "wages." Issue amended W-2 forms before due date of business tax return (to avoid the 10% nondeuctible penalty). Employees have excess contributions in account. Employee should remove before their due date with any gain to avoid 6% penalty. Have employer issue letter. Employee sends letter to trustee/custodial alon with distribution request. Ask trutee to code amount as the return of n excess. The gain is taxable and may be subject to the 25% penalty (if removed within 2 years) could always wait a year for 6%!

No, but IRS may entertain a more informal closing procedure at the District level. Contact the EP Chief Technical or the Division Chief. If not, the plan was not good for that year and all contributions should be treated as wages on amended Form W-2. If self-employed, Form 1040 and schedule C (or F) will need to be changed. SIMPLEs are very unforgiving. [This message has been edited by Gary Lesser (edited 05-17-2000).]

The 5498 (2000) should reflect SEP contributions made in 2000, and to the extent "designated to the rustee/custodian, as made for the prior year," those mde in 2001. Contributions for 2001 are made on the 2001 Form 5498.

Walk in cap is not possible, but that being said, the IRS has been known to allow a district level closing procedure. Speak to the EP Division Chief or Chief Technical. ------------------

The excess SIMPLE IRA contributions should be treated as wages for all purposes by the employer (shown on form W-2, along with the deferrals into the SIMPLE). The employee could remove the excess by due date of his or her federal income tax return "as an excess." Many trustees are hesitate to do this and want to treat the amount as subject to the 25% penalty during the first 2 years. You'll have to argue that the Code for premature distributions state that there are exceptions and that the "return of an excess" is obviouly one of them. The gain (also to be removed before the due date) is taxable and may be subject to a 25% penalty.

Aggregation with qualified plan to meet requirements is not possible. As stated above both plans can not generally exist at the same time. If benefits are accrued or contributions made to a nonSIMPLE (or other qualified plan, SEP, SARSEP), then the SIMPLE is not valid and all contributiuons are excesses in the account and the SIMPLE IRA contribution amounts should be treated as wages.

As long as the employers are not related both plans can exits. The individual can get two contributions. The 415 limit applies on the plan (or if related, plan(s)) level of an employer. Each business uses only its own compensation (or earned income). Yes, two $30,000 PS plan contributions are possible without exceeding IRC 415 if there is sufficient income from the unrelated employers.

Under IRS rules they are timely. A procedure was announced on March 15 bty the DOL - access on Benefitslink the March 15 Federal Register page 14164 (fill in both areas, but use the to button to get there).

If the error was the depositing institutions they may (or may not)coreect it and all of the paperwork. Assuming SEP contributions are not being made for other eligible employess, then the excess should be included o the W-2 form (or treated as EI is self-employed) and remnoved as an excess contribution under the IRA rules. The amount cannot be transferred from the SEP to the QP (it must be contributed by E/er to be deductible).

Elective amounts under both plans can not exceed in the aggregate $10,000 (or up to $13,000 limit if applicable). [iRC402(g)] [This message has been edited by Gary Lesser (edited 01-13-2000).]

The return of the excess is not taxable. Any gain removed (required if before due date) is taxable and probably subject to the 25% penalty. I sugest that employer provide letter of explaining excess so that employee can show it to trustee/custodian and request that "an excess contribution" is being removed. [Note: there are no citations or IRS provided rules; but are my best educated guess. I do concurr with incluion on the W-2, otherwise employer subject to 10% penalty for a nondeductible contribution.] Trustee can split the amount being distributed (excess and gain). [Position updated below by GL]

My answer: $10,000 times .9325 (IRC 1402(a)(11) = $9,235 which equals maximimum compenstion fom which the $6,000 can be deferred. $9,235.00 times 3% equals $277.05 (matching based on pre-plan $10,000)

If the LLC elects to be taxed as a corporation than W-2 income is generally their plan compensation. If taxed as a partnership, then their "earned income" from personal services would be counted (and also subject to self-employment taxes).