Gary Lesser

The plan is no longer a SEP because of the failure to notify employees of the 1997 excess by December 31, 1998. See, generally, Revenue Procedure 91-44; Treas Reg 54.4979-1(a)(4)(iii). The employer also owes a 10 percent penalty by not notifying employees by 3/15/98. Employees MAY owe 6 percent penalties _at the time_ the amounts are treated as IRA contributions. The 1998 contributions made to the nonSARSEP are disallowed deferrals. None of the amounts deferred by any of the employees are any good! See Page 4 of Form 5305A-SEP or a good book on SEPs and SARSEPs ). If he is 19 and the plan has a 0 service requirment, yes (upon earning $400), retroactive to first day of employment. After correction, the plan would no longer would appear to be top-heavy!! There is nothing to correct. The ADP failure can't be cured, the 50% failure can't be cured; your concern is how to unwind, pay penalties, give notices (and so on). Clearly, several hours of research and work--hope this jump-starts you. Gary Lesser ------------------

The preferred rule is to report the amount that exceeds 15 percent on the employees W-2. Give the employee a notice explaining that their Code Section 402(h) limit--15% of compensation--was exceeded and was included on their w-2 as wages. Explain that they are treated as having made an IRA contribution and may generally use up to $2,000 of it as an IRA contribution. Beyond that it is subject to the 6 percent tax unless corrected under Code Section 408(d)(4).

Hours, part-time, end of year employment; sometimes even death is ignored if the employee was otherwise eligible. With a 3 year requirement, the employee enters in the 4th year (Jan 1, even if the age requirement specified in the plan is met during the 4th year) provided the employee performed ANY "service" (not a defined word!) during any 3 of the 5 PRIOR years. I imagine that this is all you needed? Bye. Gary

I do not believe there is any authority for the answer you wd like to hear. Technically, the plan can be amended in respect to future years. To amend it for the current year is prohibited under the temorary and final regulations. For future years, it would be best to wait until this question is definitively answered by the IRS. For several yjousand dollars your client could ask for a private letter ruling!

Dawn, Yes QP & Simples have different definitions of earned income (in the case of an owner of an unincororted business). Although the four possible reductions applicable to qualified plans do not apply in the case of a Simple-IRA; the IRS seems to be of the opinion that the "in-lieu" of deduction found in IRC 1402(a)(12) does apply. Thus, e.g., with pre-plan Schedule C income of $10,000, only $9,235 wd be used for plan and matching contribution purposes in a Simple IRA. Both of these issues, the 92% reduction and the 1/2 of SE tax (and so on) were discussed not too long ago. Extent the period that mesages are retrieved. Hopethis helps. Gary ------------------

It is important to understand that the _amount_ that the 15 percent rate under IRC 404 (regarding deductions) is multimplied by is a moving target. Generally speaking, be sure that the total deduction (non-owners claimed on 1065 and owner's on 1040) does NOT EXCEED the sum of the following two items: 1. 15% of nonowner compensation (generally W-2) (after reduction for the elective contribution) = _____________, and 2. Pre-plan compensation, less 1/2 SS tax, less share of non-owner contr., less QNEC, less P/S, less elective (up to $10K), ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ = ____ times 15% = (2) _______. The owner's plan compensation can only be determined after the employer's contributions for nonowners is known (because amount needed to calculate 1/2 of SE tax), then SE tax, and so on. These claculations can be tested easily by hand, but generating the number in the first instance requires either luck, persistancy, or software. The latter is generally the quickest.

A detailed description of the above described correction method is provided in Proposed (since 1981) Income Tax Regulations Section 1.408-7(d)(5).

The error can not be corrected. Because there was a failure to provide a uniform allocation (although integration is permitted), the __other__ participant's have recieved "excess contribution" (possibly subject to cummulative 6% IRA contribution penalties) and the e/er has made a nondeductible contribution (subject to a one-time 10% penalty). The good news, the gain may remain in the account.

Remove the excess (after taking the employer's contribution into ac****) on or before the due date of the individual's Form 1040 along with any gain thereon. So, if the S-E earned, say $4,000 is to be matched 100% up to 3%: $4,000 x .9235 = $3,694 (IRS called for reduction under IRC 1402) $3,694 / 1.03 = $3,586.41 (elective amount) $3,586.41 x 3% = 100%/3% match of $107.59. $107.59 + $3,586.41 = $3,694.00. The SIMPLE-IRA trustee will Code the 1099-R to reflect that only the gain (from first prior year) is taxable for such year. The return of the nondeductible excess contributions is not taxable when distributed. [iRC 4972(d)((1)(A)((iv)]

The plan must say more about compensation, if not, compensation means "the compensation of the participant for the year." Since that isn't much help, you'll hve to see the regulations which contain several choices that the plan may choose from. You are correct in including the elective amount for calculating the 25% limit under Code Section 415 (and, unless excluded, for ADp purposes. The aggregate 15% limit under Code Section 404 is computed after subtracting out the elective defferrals. The compensation of a S-E individual is his or her earned income after the reduction for the contributions for that owner (and pro-rate common-law employee share), 1/2 of the deduction under Code Section 164(f), and the elective amount. The elective amount may be added back in for 415 purposes (and ADP if considered under the plan). The regulations that appears to limit the contributions to owners's to only 15% of the _owner's_ (only) compensation were invalidated by changes made to Code Section 404 (the IRS has informally confirmed this). Thus, a fully integrated plan is okay.

No. Deferred compensation can not be deferred a second time. As a general rule, the compensation has to be currently earned.

No. Deferred compensation can not be deferred a second time. As a general rule, the compensation has to be currently earned.

SEPs are still in existance. Existing SARSEPs (salary reduction SEPs) are grandfathered. If the SEP of a predecessor is adopted; all service with the predecessor must be counted (for most purposes)under IRC 414(a).

DCARTER: $7,304.34; that is, 10.43 percent (subject to the 125% rule) of Joe's pre-plan compensation can be contributed by Joe as an elective amount if Joe's employer contributes 3 percent. $70,000 - $7,304.34 = $62,695.65 x 15% = 9404.34 is 15% limit $7,304 + $2,100 = $9,404 = 15% The MAX that may be excluded from Joe's income is 15% of what's taxable; that is, after his elective contribution (whatever it is, up to the $/% limit)is subtracted. After the subtraction, not more than $160K can be considered--times 15% = $24K. That's right 15% by e/er, but only 13.04 if by e/ee only. So the "whales" who won't be getting the 3% can do 13.04 of their pre-plan (which equals 15% post plan) compensation. CATHY: I always encourage my student to read all Code Section to the very end. The adj. to the $150K limit is found a few subsections later at 408((k)(8) =

So your confused why 15% "exclusionary limit" doesn't equal 15%. Well it does, but it is 15 percent of "includible" compensation; that is, after reduction for the elective amount. If ONLY the employee contributes, then 13.043478 of pre-plan compensation will equal 15 percent of taxable compensation (after reduction for salary reduction amounts). In the case of a SARSEP, the 15 percent limit is determined after the elective amounts have been subtracted from compensation or net earned income (net EI) (if self-employed). Since a 3 percent contribution is already being made, that leaves 12 percent assuming you already know the amount your looking for. Otherwise, the maximum percentage is 10.434783 percent [(15-3)/1.15] of pre-plan W-2 compensation*. {IRC 402(h)] The amount is also subject to the dollar limit, currently $10,000. If the employer were to contribute more, say 10%, then 4.347826 could be contributed by the employee. Since $160,000 is the most that can be used for any calculation, $24,000 is the most that can currently be contributed to a SEP/SARSEP (absent another plan, such as a (e.g.) 10 percent money purchase pension plan, then $30,000, in total). For a W-2 employee earning $10,000, $1,500 is the most that could be contributed by the employer if the employee defers nothing. The employee could defer 13.04 percent if the employer defers nothing. Many financial institutionshave prototype SEP/SARSEPs so that contributions can be "integrated with social security" when the employee earns significantly less than the owner (and less than the taxable wage base,curently $72,600). Contributions are made into IRAs established by employees. Hope this helps. * Additional considerations apply to all self-employed individuals. Somewhere on this site there is software to handle SEPs and SARSEPs. The employer's 15% contribution limit is based on the same amount. The employer's contribution of 3 percent must be allocated in accordance with plan provisions (which determine whether the 3% allocation is based on pre-plan compensation or the amount after reduction for the elective contribution).

No. All eligible employees (and owners if self-employed) must participate; there can be no opting out. If over 59.5, then it could be an "in-out."

The extension of the nonstatutory SEP rule regarding successor plans and terminating qualified 401(k) plans make sense from a policy standpoint; that is the purpose of IRC 410(k)(10)(A)(i) is to prevent participants from gaining premature access to their funds (which would occur in a SEP (or SARSEP)). In addition, the only contributions allowed under a simple ira are "qualified salary reduction arrangement" contributions; thus, the plan would fail to be a simple if 401(k) amounts were transferred into the successor SIMPLE IRA. IMNSLO, IRC 408(p)(2)(A)(iv) should give you sufficient comfort to "believe."

Can't believe that the assets were returned to the employer. In some settings that could be viewed as a prohibited transaction. The employer should merely have included the amount on the employee's W-2. In any case, the trustee or custodian should use Code P (Code Code 8 if distributed during the plan year that the excess occurred) in box 7. For example, assume an excess of a $300 contribution and the return of $30 of gain (gain is required to be distribute if excess corrected before the due date of the individual's return). $300 is entered in box 1, $30 entered in box 2a, and the code (8 or P) is entered in box 7 of Form 1099-R. The correction method used was not valid and should be reversed upon the advice of the client's tax/ERISA counsel. The money belongs to the IRA holder! [This message has been edited by Gary Steven Lesser (edited 02-14-99).]

In nearly all cases a SEP is discretionary; thus, a vanilla SEP can be forgotten at any time. To get rid of it more formally, amend it by resolution and follow the participant notice requirement contained in the document for "any amendment."

Pully, No. For a more complete response, set your reader to see messages for a longer period of time; as this was discussed about two months ago.

Yes (for the purpose of satisfying the 3/5 year eligibility req't all e/ees of related e/ers are considered). No grace period rules as in SIMPLE plans. [This message has been edited by Gary Steven Lesser (edited 02-14-99).]

You are correct in your thinking. Amendments made during the year can be made effective during the year, BUT ONLY if they are not inconsistant with the 60-(or more) day Notice (previously distributed).

The SEP/SARSEP contributions are considered in the 25% limitations under IRC Sections 415 and 404; that is, along with any MP or PS contributions. Thus, a 25% MP and a SEP wouldn't work; incidently, the MP wd be disqualified first under 415. The 15 percent PS limit is directly reduced by any SEP/SARSEP contributions. It should be noted that the 15 percent "exclusionary" limit applicable to individuals under IRC 402 is still based on taxable compensation. [This message has been edited by Gary Steven Lesser (edited 02-14-99).]

Agreed. If the document is only a SARSEP, then the only true employer contributions that can be made are those that are required to be made to non-key employees if the plan is top-heavy (and the T-H rule is being satisfied in that plan).

Distributions under SIMPLE 401(k) plans are governed by the terms of the particular 401(k) plan. In a SIMPLE IRA, amounts withdrawn before age 59.5, generally, would be subject to a premature distribution penalty of 20 percent (rather than the normal 10%) during the first two years that the SIMPLE IRA plan was in existance. If over 59.5 (or one of the other exceptions apply), amounts in a SIMPLE IRA may be withdrawn (subject to tax) at any time without penalty (10% or 20%). Hope this helps.