Gary Lesser

The list or required modifications (LRM) issued 6-1977) provides this statement. The LRM is reproduced in the SIMPLE, SEP, ans SARSEP Answer Book (5th Ed) on page L-20.

The rules remain the same. Model plans and prototype plans are available from many financial organizations.

Arguably by having the employer include them as wages on the form W-2 and by having the employee treat them as excesses (and, in general, remove them with gain by due date of return). [see IRC Sec. 408(d)(4) and (d)(5)] A letter to that effect on employer letterhead by employer would be helpful in having the employee requested correcting distribution coded so that it is not taxable and not subject to the 10% (25% if made within the first two years). The gain, however, may be subject to the 25% penalty if removed (as is required before due date); arguably, the excess amount is not penalized (and is not taxable; as already shown on Form -W-2). Not much authority here, nor is any available that I am aware of. Comments welcome. [This message has been edited by Gary Lesser (edited 11-15-1999).]

1. Arguably the arrangement could fly under IRC 408(p)(2)(D). [i MAY ALSO LIKE TO THINK ABOUT THIS SOME MORE; PERHAPS OTHERS WILL RESPOND TOO] All rules, notices, and so on for both plan would have to be followed / made. There cd be several problems if non-owner employee's were involved. 2. All elections for the SIMPLE wd have to be in place by December 31. No minimums in a SEP, can be avoided in a SIMPLE. 3. Yes.

And provided to existing participants that are eligible to participate for the period to which the notices relate. Terminated employees wd not get any notices.

I do not entirely agree. The contributions made by the employer were designated as employer SEP contributions. The SEP is not ipso facto bad; although the document does ~not~ carry any reliance as to ~form~, but is still a legal document (and is probably okay anyway if 415 not violated). IMO a SEP contribution has been made and causes the PS limit to be reduced by the deductible contribution. OTOH, if an employee was eligile, but didn't receive a contribution, then it could be argued that none of the SEP contributions are deductible (and amounts treated as wages). Unlikely that trustee will recode (amounts belong to employees). Even if employees agree, then amount contributed (transferred) to PS must come from a conduit IRA--which this is not. QP could be disqualified. BE CAREFULL e

You do not have to distribute the model form provided a Summary Description is provided at the same time as the other 60-day notices. Cleary, absent guidance, it wd be wise to simple distribute the model forms. See Form 5304-SIMPLE, page 6, first column.

It would appeal that the controlled/affilliated/related employer rules would not apply to separate government bodies (separately incorporated). This may be a good question to ask Carol Calhoun on the Gov't Plan Board if it becomes an issue for you.

A SEP may be established by an employer of any size; salary reduction (SARSEP) features are not permitted, however, if the employer had more than 25 employees at any time during the prior year. Thus, there is no limit on the number of employees that could participate in a grandfathered SARSEP for any nonconsecutive year.

Deferrals may start on January 1, 2000. Since notification was made on December 1, 1999, employees may elect to participate/or change for 60 days. If deferrals start no sooner than the end of the 60 day period, then all participating employees will be known when program kicks of.

Deferrals may start on January 1, 2000. Since notification was made on December 1, 1999, employees may elect to participate/or change for 60 days. If deferrals start no sooner than the end of the 60 day period, then all participating employees will be known when program kicks of.

I have no problem with IRA beneficiaries naming beneficiaries (to take any interest they may have or get) whether the original IRA owner is alive or not if the documents so permit. Whether for RMD purposes the account has a "designated" beneficiary is a totally different matter. If a beneficiary can appoint/substitue another to take their place then such person or persons are NOT "designated beneficiaries" and distribution options upon owner's death are therefore fewer (at least as rapidly or 5 years i wd imagine are the longest). [This message has been edited by Gary Lesser (edited 10-15-1999).]

Yes. That ruling only clarified that once the owner dies, the "designated beneficiary" for RMD purposes may not be changed. The first beneficiary could name a contingent beneficiary to receive any remaining interest upon his death. The ruling is dated June 16, 1999, but was just recently released

If using IRS model documents a QP may not be maintained for the same year (thus, it could be argued that all contributions are excesses in the IRA and the employer sd treat them as wages for all purposes (including allocations under the PS plan!). Under a prototype plan the SARSEP contributuons reduce the otherwise allowable profit-sharing contribution. Hope this helps you. Is it possible that a new tax year began on July 1. If using a prototype it is unclear whether the employer is giving up the SARSEP permanently or temporarily.

1a. Yes. 1b. No. 2a. For 404 deduction purposes, compensation is based on business taxable year (FY) compensation. 2b. Compensation for deduction purposes is based on includable taxable compensation; therefore the SIMPLE contributions do not count as compensation (for deduction liitation purposes). 2c. Yes. Contributions "shall be treated as if they were made to a plan subject to the requirements of this section." Extract from IRC 404(m)(1).

The answer depends upon the facts. The degree of faith one gets from the answer, therefore, stroingly related to the facts. Now, if they are "payroll deduction IRAs" and amounts were defered in excess of $2,000 then they are also subject tpo tax and become the employee's problem. However, it is unlikely that the trustee or custodian wd accept such large amounts. Therefore, (I'd wager) that they were contributed and designated as SEP contributions--and therein the problem lies. What did the employees sign if anything to have their wages "reduced" or "set-aside?" What other informationwas provided? E/ee don't just suffer a reduction in pay w/o knowing what it is. The saga continues...

1a. Yes, proration is needed in the case of the PS plan. 1b. No, simple contributions aren't annual additions for 415, but they wd count as elective under 402(g) in case the PS has 401(k) features. 2a. FY (business taxable year)compensation ius used for deduction purposes. 2b. Not for deduction purposes. Allocations cd be different depending upon plan's definition of compensation. 2c. Yes (IRC 404(m)).

1a. Yes, proration is needed in the case of the PS plan. 1b. No, simple contributions aren't annual additions for 415, but they wd count as elective under 402(g) in case the PS has 401(k) features. 2a. FY (business taxable year)compensation ius used for deduction purposes. 2b. Not for deduction purposes. Allocations cd be different depending upon plan's definition of compensation. 2c. Yes (IRC 404(m)).

1a. Yes, proration is needed in the case of the PS plan. 1b. No, simple contributions aren't annual additions for 415, but they wd count as elective under 402(g) in case the PS has 401(k) features. 2a. FY (business taxable year)compensation ius used for deduction purposes. 2b. Not for deduction purposes. Allocations cd be different depending upon plan's definition of compensation. 2c. Yes (IRC 404(m)).

The Keogh must permit the distribution; willy nilluy withdrawals are not allowed (unless an event permitting distribution has occured). Under the Code distributions made on account of the plan's termination may be rolled over. If done as a direct transfer, then the withhoding rules would not apply. If not paid on account of termination the amount received may only be rolled over/transferred if it is not a periodic payment as defined in Code Section 402©. Hope this helps.

Under a profit-sharing plan contributions can generally be discontinued without having to terminate the plan. If the discontinuance in a discretionary PS plan is just temorary there are generally no adverse affects, in other cases the plan may be deemed terminated (in whole or in part) and unvested amounts may become vested immediately. Problems generallt arise as to vesting after 2 years of little or no contributions. The pn has to be kept current and there are of course administration expenses.

From the SIMPLE, SEP, and SARSEP Answer Book (5th Edition), Question 5:24. To the extent that employer contributions do not satisfy the written allocation formula, the contributions are generally deemed to be contributions that are not made under a SEP arrangement. [Prop Treas Reg § 1.408-7(f)(1)] Instead, such contributions are deemed to be made to an IRA not maintained as part of a SEP. [Prop Treas Reg § 1.408-7(f)(2)] Elective contributions are not treated as employer contributions for allocation purposes. Employer contributions that exceed the amounts called for under the written allocation formula for the SEP arrangement are treated as if made to the employee's individual retirement account or individual retirement annuity, maintained outside the employee's SEP. It is contemplated that the employer will notify the employee of the amount of the non-SEP contribution made in excess of the allocation formula when it discovers the erroneous contribution. [Prop Treas Reg § 1.408-7, Preamble] Because this amount may result in an excess contribution when made, the employee may wish to take appropriate action in order to avoid IRA penalties. The normal IRA rules under Code Section 219 apply in such a situation and prevent the entire SEP arrangement from being disqualified due to an inadvertent error on the part of the employer, such as an incorrect calculation of employee compensation. Under Code Section 408(k), the entire SEP arrangement could be disqualified on account of the excess contribution. The rule treating the amounts as IRA contributions provides relief in such cases. Similarly, other contributions such as voluntary contributions made by the employee, or on behalf of the employee by the employer as the agent for the employee (such as by payroll withholding to a "payroll deduction IRA"), are treated as employee contributions and not employer contributions for allocation purposes. Example. In 1999 Weed Corporation adopts a SEP arrangement. The arrangement calls for Weed to contribute the same percentage of each participant's compensation exclusive of SEP contributions to a SEP (allocation compensation). Weed has three employees, Al, Bill, and Carl, who satisfy the participation requirements of the SEP arrangement. The compensation, the contributions to the SEP for each employee, and the varying treatment of the contributions are set forth in the following table. (1) Employee (2) Gross Income (3) Net Compensation Before (4) ContributionSEP/IRA Contribution (5) % of Net Compensation (1) (2) (3) (4) (5) Al $11,000 $10,000 $ 1,000 10 Bill 11,500 10,000 1,500 15 Carl 57,500 50,000 7,500 15 Total $80,000 $70,000 $10,000 Because only 10 percent of compensation was allocated to Al, and the allocation formula provides that the same percentage must be allocated to each participant, portions of the contribution under the SEP are deemed to be made to Bill and Carl's IRAs that are not part of the SEP arrangement. To determine Bill and Carl's allocation compensation, the respective total compensation included in their gross income must be divided by 1.10 (1 plus the percentage of allocation compensation contributed to Al under the SEP arrangement). The excess of compensation included in gross income over the allocation compensation is considered to be a contribution under the SEP arrangement. The following table shows the result of this calculation. Employee Gross Income Allocation Compensation* SEP/IRA Contribution Deemed IRA Contribution** Al $11,000 $10,000 $1,000 $ 0 Bill 11,500 10,455 1,045 455 Carl 57,500 52,273 5,227 2,273 Total $80,000 $72,728 $7,272 $2,728 Under Code Section 404(h), for purposes of computing Weed Corporation's deduction, only the $7,272 is considered to be a contribution to a SEP arrangement described in Code Section 408(k). The allowable Section 404(h) deduction of $10,909 (15 percent of the excess of total compensation of $80,000 over the SEP contribution of $7,272 or 15 percent of $72,728) is not exceeded. The $2,728 amount is treated as a payment of compensation and subject to the deduction rules of Code Section 162 or 212 (see Q 10:2). Code Section 404(h)(1) treats employer SEP contributions as if they are made to a plan subject to the requirements of Code Section 404. Code Section 404(a) provides special rules for deducting contributions and limitations on amounts that "would otherwise be deductible." Similarly, the deemed IRA contribution of $2,728 would not be considered as an employer SEP contribution for purposes of exemption from FICA and FUTA taxes under Code Sections 3121 and 3306. The effect of treating the $2,273 as a contribution to a SEP arrangement for purposes of Code Section 408(a)(1), 408(B)(2)(B), and 408(d)(5) is to prevent disqualifying Carl's IRA for accepting non-SEP contributions in excess of the annual $2,000 individual IRA limit [iRC § 219(B)(1)] and to allow Carl to withdraw the excess contribution of $2,273 without including that amount in income under Code Section 408(d)(1). The deemed IRA contribution should be included on Carl's Form W-2 as wages for 1999.

You don't have a valid 457 plan. You do have a SEP with an employer contribution. The contribution does not satisfy the "uniform" contribution requirment. In a sense, the lowest contribution rate is used and applied to all participants; resulting in excesses for some. None of the amounts are treated as elective deferrals. Here goes--

Paul, a complete answer; thanks. One additional thought, if the SARSEP is terminated it may not be able to be resurected. Why not keep the SARSEP because of its cheap elective features and, in general, almost instant Roth convertability. Employer should of course seek a PLR on the SARSEP or sleep with one eye open. If the plan is not approved, then the short "alternate" DOL disclosure requirments do not apply (and results in a rather large rattlesnake pit).

No problem since the SEP contribution made on account of the prior year is treated as being made for that year and not the current (Simple) plan year.