Gary Lesser

Does the trader file a Schedule C or receive W-2 income? Could the trader perform his service for more than one company or does he operate his/her own trade or business for profit? If the trader is operating a trade or business and is not an employee of some other entity it would appear that he/she has earned income under IRC 401©. Why do you think that the individual doesn't qualify for a SEP/QP?

An employer has nonqualified stock option ("NQSO") plans, as well as an incentive stock option ("ISO") plan described in section 422 of the Code. The employer wants to exclude income from exercise of both NQSOs and ISOs from the definition of compensation for pur poses of determining HCEs for the ADP test. Can both types of income be excluded using the 415©(3) definition of compensation? More specifically, can ISO-related income be excluded under 415©(3)? Under reg 1.415-2(d)(3)(ii), the 415©(3) definition of compensation excludes income from exercise of NQSO. Reg 1.415-2(d)(3)(iii) excludes "amounts realized from sale, exchange, or other disposition of stock acquired under a qualified stock option." But there aren't any qualified stock options any more. This reg was adopted in 1980, when "qualified stock options" (under old IRC sec 422) had only one more year of life (they were phased out from 1976 to 1981). Incentive stock options ("ISOs") were not added under IRC sec. 422A until 1981. The code section for ISOs was changed from 422A to 422 in 1990. Under IRC 422 and 421, no income is recognized under an ISO at grant of option, and income at sale of stock is capital gain. But if employee sells within 2 years of grant or 1 year of receipt of stock, then it is a "disqualifying disposition," resulting in ordinary income reported on W-2, but from which no FIT withholding is required. Are ISOs treated as "qualified stock options" for which all amounts realized from sale, exchange, or other disposition is excluded from compensation? Or is income from a disqualifying disposition of ISO stock treated as being from the exercise of nonqualified stock option and therefore excluded? The other safe harbor definitions of compensation will not work. W-2 income includes both NQSO and ISO income. 3401 includes NQSO income (but does exclude ISO income). Could the answer be as simple as "it all depends how compensation is defined in the document" !/?

Interesting question. Could you elaborate on the settlement, what happened, when, and so on? A SEP is not dependant on hours of service (but rather on the performance of services). Can we assume that the e/ee was once a participant? In 1997? Was any service performed during 1998 even though the effective date was 12/31/97? How is compensation defined in the document?

Are you suggesting that the employees of "B" don't have to be treated as if employed by one employer or just adding some dicta for future years (i.e., 1999 and 2000 in case "B" has a plan or causes the 100 e/ee limit to be exceeded)? IMO the employees of "B" would have to be considered notwithstanding the grace period rules of Code Section 408(p)(2)(D)(iii). [see IRC 414(B), as amended to include a reference to 408(p)] [This message has been edited by Gary Steven Lesser (edited 11-12-98).]

Although not yet in existance "smallplan.com" is being built for such purposes.

This is a really good question. Although it is not entirely clear, I believe the answer is somewhere between "no" and "maybe" (although a MRD may not be rolled over or transferred to an IRA). Code Section 408(a)(6) provides that rules similar to the rules of Code Section 401(a)(9) apply to an IRA. Prop Treas Reg 1.401(a)(9)-1(e), Q&A G-2 reads as follows: G-2. Q. If an amount is distributed by one plan (distributing plan) and is rolled over to another plan (receiving plan), how are the benefit and the minimum distribution under the receiving plan affected? A. (a) Except as otherwise provided in paragraph (B), if an amount is distributed by one plan (distributing plan) and is rolled over to another plan (receiving plan), the benefit of the employee under the receiving plan is increased by the amount rolled over. However, the distribution has no impact on the minimum distribution required to be made by the receiving plan for the calendar year in which the rollover is received. But, if a minimum distribution is required to be made by the receiving plan for the following calendar year, the rollover amount must be considered to be part of the employee's benefit under the receiving plan. Consequently, for purposes of determining any minimum distribution for the calendar year immediately following the calendar year in which the amount rolled over is received by the receiving plan, in the case in which the amount rolled over is received after the last valuation date in the calendar year under the receiving plan, the benefit of the employee as of such valuation date, adjusted in accordance with F-5, will be increased by the rollover amount valued as of the date of receipt. For purposes of calculating the benefit under the receiving plan pursuant to the preceding sentence, if the amount rolled over is received by the receiving plan in a different calendar year from the calendar year in which it is distributed by the distributing plan, the amount rolled over is deemed to have been received by the receiving plan in the calendar year in which it was distributed by the distributing plan. (B) If an amount is distributed by the distributing plan after the employee's required beginning date under both the distributing plan and the receiving plan, and the designated beneficiary of the employee under the receiving plan is a designated beneficiary with a life expectancy that is longer than the life expectancy of the designated beneficiary under the distributing plan, the following rule will apply. In such case, the receiving plan must separately account for the amount rolled over and treat it as a separate benefit. It must then begin distribution of such separate benefit in the calendar year following the calendar year in which the amount rolled over was distributed by the distributing plan. The separate benefit attributable to the rollover amount must be distributed over a period not exceeding the period (including any adjustments for recalculation under section 401(a)(9)(D), if applicable) used by the distributing plan to determine the employee's minimum distribution with respect to the benefit attributable to the amount rolled over. For purposes of determining the life expectancies or lives used to determine the minimum distribution under the receiving plan, the designated beneficiary under the distributing plan will be the designated beneficiary under the receiving plan (with respect to the benefit attributable to the amount rolled over). If such beneficiary is changed under the receiving plan to a different beneficiary from the designated beneficiary under the distributing plan, or a beneficiary is added who was not a beneficiary under the distributing plan, the rules in E-5 applicable to changes in beneficiaries will be used to determine the period over which distributions must be made by the receiving plan. [This message has been edited by Gary Steven Lesser (edited 11-04-98).] [This message has been edited by Gary Steven Lesser (edited 11-04-98).]

To the extent that the conversion amount is taxable it may have an effect on the taxability of SS income. May be better off not using 4-year spread. I am not sure what you mean by 70.5. Unlike a traditional IRA, a Roth IRA may produce less taxable income after 70.5.

That rule (partner matching in 401(k) plans eating up $9,500 limit) doesn't exist in SEP/SARSEP and SIMPLE land, and was repealed in 401(k) land (after 1997). SEPs and SARSEPs do not allow for matching contribution. Salary reduction contributions eat up the 15 percent limit, reduce the maximum dollar limit ($24K if ultra net earned income is $160K or more), and also reduce pre-plan earned income. Only the salary reduction contribution eats up the 402(g) limit. For example, self-employed earns $191,671 (pre-plan) for 1998 and makes an elective contribution of $10,000. An employee earns $10,000 and makes an elective contribution of $543.48. The employer contributes 8.749997 percent of ultra net EI and same percentage on employee's compensation of $9,456.52 ($10,000 less an elective of $543.48, see below). Owner gets $24,000 ($14,000 employer + $10,000 S/R) computed as follows: $191,671.00 (pre-plan compensation) less 875.00 (e/ee contribution) less 6,795.70 (1/2 SE tax deduction)* less 14,000.00 (e/er contribution) less 10.000.00 (elective contribution) equals $160,000.00 (Ultra net EI) times .08749997 Contribution rate)* equals $14,000.00 (e/er contribution) add $10,000.00 (elective) equals $24,000.00 (15%/$24,000 limit) * Amounts and percentages calculated using QP-SEP Illustrator Software. [The SE tax was based on $190,796 ($191,671 - 875 employer contribution for employee).] The employees elective contribution was $543.48 and was the maximum allowed without producing an excess when employer funds were added to plan. Both employees got 15 percent of their compensation used for deduction purposes; that is, includible (taxable) compensation under IRC 404(h).

Partners may participate in a SEP/SARSEP. After several reductions (for their own SEP and SARSEP contributions, share of non-owner contributions, and 1/2 of the self-employment tax deduction) they are limited to 15of ultra net earned income). The S/R portion is also limited to $10,000 (for 1998 & 1999). Unless you have a specified percentage in mind for the non-owners (or if the plan is integrated with social security) software is generally needed to quickly crunch owner contributions and illustrate the plan.

Assuming both entities are controlled (e.g., owned 80 percent or more by same 5 or fewer persons), then all employees of A and B are treated as if employed by single employer (and plan should be adopted by b).

General rule of thumb: If it ain't broke don't fix it. Why not ask how they can reduce your fiduciary liability (which probably isn't that high to begin with) and what they will do and how often they will do it. Surely they don't want to be a fiduciary with respect to the plan. Ask them if they have any objection if you or the participants "blindly" follow their advice "every" time it is given. Get it in writing (signed). Your prime responsibility (once you have prudently selected the investment vehicles) is to annually review them to determine if they are meeting their stated objectives and following their policy. Keep a file. A "full service" broker that would issue you an annual "fiduciary report" would be nice (but it probably won't happen). Will they calculate contributions and participant allocations under the plan. Aside from investing and reinvesting plan assets what else will they do? Will they provide individualized advice, give seminars, do financial planning? Get it in writing?

My response was in regard to the question you asked regarding an OVERFUNDED Simple IRA plan. Simple plans still exits; although the one you inquired about (being overfunded) may have ceased to exist. While I do not buy in to the IRS's position it has been stated in public. A PLR is probably the only recourse since the IRS will not officially answer the question in writing.

According to IRS (although not in writing) the SIMPLE plan has ceased to exist and none of the contributions by any of the employees or the employer are valid. The "excess" contributions are excess contributions. They can't be used up since a simple IRA can not be used as an IRA. Seems as though they should be removed by the employee and the employer should treat them as "wages" for all purposes. Perhaps others will have other ideas!! If your client seeks a private letter ruling (PLR) I would love to be involved (and or copied on all correspondence)! Is there any chance that the EE money could be treated as ER money??

Your read is correct; the deduction for a fiscal year business is delayed (just like a calendar year SEP adopted by a FY taxpayer).

SEP contributions (only) would be permitted for such year. If elective contributions have been made, then they are all treated as regular IRA contributions and the amounts should be treated (for all purposes) by the employer as "wages." It would be nice if the employer also provided an explanation of why the amounts were included on the W-2. IMO, if the amounts are included on the W-2, then the employer will not have to pay the 10 percent penalty.

The IRS has not issued any guidance on what would happen if the employer failed to make the contribution it agreed to make in the Notice to employees. IMO, the termination will not be effective until the following year. Rights under applicable state laws may have also been created. OTOH, an amendment not inconsistant with the notice to employees might arguably be permitted (e.g., a change in documents from one vendor to another).

Your understanding appears to be correct. [iRS Notice 98-4, Q&A D-4]

Absolutely not. Only a partner in a partnership (and arguably a sole-proprietor as well). This "window of opportunity" would never apply to a common-law employee (including a shereholder employee of a Sub S) paid on a W-2. Consider too, that (in respect to partners and self-employed individuals) it is _my_ interpretation of the preample.

Although I agree with QDROphile, it should be noted that a PARTNER's salary deferral amount (depending upon the circumstance) may be contributed long after the year is over; for example, the accountant hasn't determined the earned income (if any) of the partners. In such case, the regulations _appear_ to permit a contribution at a later date than would apply to an employee whose wages are reported on a Form W-2. [in the case of a partnership, a cash draw could be characterized as a return of capitalby the time the CPA does his or her analysis.] From the preamble to the plan assset regs: <--------------CUT HERE-------------> Two comments were received relating to when contributions by partners to section 401(k) plans become plan assets. The letters represent that, under 26 CFR 1.401(k) -1(a)(6)(ii), a partner's compensation is deemed currently available on the last day of the taxable year, and an individual partner must make an election by the last day of the year. They ask when the monies, which otherwise would be paid to a partner, but for the partner's election, become plan assets, inasmuch as partners do not receive wages. In the view of the Department, the monies which are to go to a section 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 [ed: read 30 days for SIMPLE] after the month in which those monies would, but for the election, have been distributed to the partner. [Note: This message was edited by Gary Steven Lesser]

Generally yes, but in accordance with the LRMs (Lists of Required Modifications) not yet issued.

Ditto for a SEP arrangement. In both cases, be sure the document actually provides for the exclusion of leased employees (most don't)

In other words, if an employer has leased employees who are required to be treated as its own employees under Code Section 414(n), the leased employees must be treated as employees of the employer for purposes of the employer's eligibility to establish a SIMPLE. [iRC § 414(b), 414©, 414(m), 414(n), 414(o)]

I think the best way to interpret Q/A 6 is that the "election" cannot be revoked, but that that the amount can be recharacterized. From a reporting point of view this makes sense (although the reporting rules do not provide the IRS with the info they need when accounts are going up and down in value). Information that will be required to be attached to Form 8606 will most likely provide the IRS with the remaining information needed for tax compliance and administration. I do believe that a converted amount can be recharacterized and then converted again (at hopefully a lower value). [This message has been edited by Gary Steven Lesser (edited 09-17-98).]

The propsed regulations specify that the substantially equal periodic payment must come "from the Roth IRA after the conversion." Arguably, however, in the case of a partial conversion apportionment is required. GSL

>>I had a self-employed elect 100% of net income, which might be less than $6,000. The IRS believes that only 92.35% of a self-employed's net income (defined as Net Earnings from Self-Employment) may be utilized for plan purposes. In addition, the amount would have to be recharachterized for the (assumed) 3 percent matching contribution. Assuming the 92.35 percent adjustment has not yet been made, then the contribution and matching contributions would be as follows (cents ommited). I have assumed three levels of net income. Net Inc 92.35% Sal Red Match Total ~~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~ ~~~~~~ $6,000 $5,541 $5,374 $166 $5,541 $5,000 $4,617 $4,479 $138 $4,617 $4,000 $3,694 $3,583 $111 $3,694 The idividual may possibly be entitled to a deduction under Code Section 164(f) for one-half of the self-employment tax. >>Net income for 1998, will not be determined until 4/15/99. I believe that the amount of compensation for tax and plan purposes is determined on the last day of the self-employed individual's taxable year; that is, generally, December 31. In the case of a partner, compensation is determined on the last day of the business taxable year. [see Treas Reg § 1.401(k)- 1(a)(6)(ii)(b)] So I suspect the same would apply to a sole proprietor. >>When is the correct time for the contribution to be remitted to the trustee? The IRS has never answered this question directly in the case of a self-employed individual, but the actual election to defer must be made _before_ 12:00 p.m. on December 31. As a practical matter, the deferrals are made periodically (and hopefully supported at year's end). Contributions for partners and sole proprietors could also be made at years end (provided they have not been paid out to the individual any sooner) and must be remitted timely (end of month + 30 days of date otherwise paid). The match can be made up until the due date of the return (including extensions).