Gary Lesser

The amendment terminating the plan effective as of the beginning of the following plan year could be made before the beginning of the next plan year. Obviously, no contributions will be made for the 2009 plan year under the Simple-IRA plan. The termination should be communicated to participants as soon administrativel possible, and preferably, before the next plan year begins. The trustee/custodian should also be notified (after the last contribution is made for prior year) that the plan was terminated effective date 12/31/08 and that they should no longer accept any contributions under the employer's plan. Alternatively, without any formal termination, the plan will "not be treated" as a QSRA "for any year if the employer maintains...." If any notices were given, they can be changed/recinded because of the exclusive plan rule. [iRC 408(p)(2)(D)] Does the plan contain any provisions regarding amendments or this situation?

Unless contributions were made for 2008 to this new plan, the Simple IRA would not be invalidated. Is it really necessary for this to happen in 2008 (and create a mess for everyone)? Why can't the new plan be made effective in 2009 even if put in place before year end? The elective contributions are treated as employer contributions for some purposes, including the 10% (cummulative) tax on nondeductible contributions. If the plan is invalidated as a matter of law, the excesses will have to be dealt with. Generally, the employor would include amounts on W-2, notify employees of what happened; and notify the trustee that the plan has been terminated (by operation of law). If otherwise termininated, the termination cannot be any earlier than next year, and the trustee notified (after any required employer contributions). To avoid penalties (6% cummulative), any excesses in the Simple-IRA's needs to be corrected by the owner(s) (generally) on or before the due date of the employee's tax return. Hope this helps.

The two-year rule is set in stone. The 25% penalty does not apply on account of plan termination. It may apply to distributions from the SIMPLE IRA, unless an exception applies. The trustee/custodian should also be informed of the termination and that they are to accept no further contributions. Hope this helps.

Bergybass - Some additional information might be helpful. The insurance company will require that the employer have a SEP agreement to establish a SEP/SARSEP-IRA. It is doubtful the insurance company would accept the mutual fund's SEP agreement for that purpose. Please clarify-- 1. Are the non-integrated IRS model forms being used for the SEP? 2. Would an integrated plan be more suitable with 6 employees? 3. Will both IRA sponsors accept the same SEP document (e.g. model SEP) or will employer maintain both plans? 4. Will subsequent contributions for all employees, or just the owner, go to the insurance company IRA? 5. Might there be any fiduciary considerations involving sales charges/breakpoints if the owner's account were to leave the pool (or for that matter switch entirely to an unrelated pool)? Although the owner has the right to do (say a rollover or transfer) to another traditional IRA, could it cause a fiduciary breach? Hopefully, someone with more expertise than I have, will respond to this item 5. Clearly, if any employee is able to select an outside institution (or selected institutions) then all employees would have to be given that option; and clearly have notice of that right. In fact, they would have to be given the opportunity to have their contributions go to the IRA or IRAs available under the plan(s). Unless a group IRA trust is being used, it would not be possible to require that employees move existing funds to another institution.

There may be a "breakpoint" advantage by using the SEP-IRA of the sponsor of the funds used in the 403(b) plan. Many of the major fund families have prototype SEP-IRAs (e.g., Seligman, American, among many). The IRA accounts can be set-up/established by most any broker-dealer registered representative.

New files uploaded 11/28/2008. 2007 version.

1. Doesn't the employer have until Oct 15 of the year following the year for which excess contributions have been made to make a corrective withdrawal and avoid the penalty (although this amount would be includable as ordinary income to the employee and a possible 10% penalty on the earnings to the employee if < 59.5? The trustee or custodian will not allow an employer to unilaterally remove funds from an IRA. Other rules apply under the EPCRS. By showing the exess on the W-2, the employer has done all it can do as far as a "correction" is and (arguably) is not subject to the 10% penalty on nondeductible contributions. A notice from the employer would help (see BruceC's response). If the "correction" is not made (generally amended W-2) by the due date for filing the return, the 10% penalty would seem to apply for that year. 2. If not a SARSEP, why would the employee be subject to a 6% penalty? The employee didn't have anything to do with the making of the contribution. The excess is in the IRA. The penalt can be waived or reduced. 3. We're only talking about the excess....correct? This would not impact the contribution that are within the contribution maximums, wouldn't it? Correct. However, special disqualification rules may apply if the 100%/$46,000 (for 2008) limits are exceeded. 3. Somewhat unrelated, but may an employer ever designate SEP contributions as after-tax? No, all nonelective SEP contributions are pre-tax.

Download attached chart. May be reproduced and circulated within your organization. COLA_RO_2009.pdf

Download attached chart. May be reproduced and circulated within your organization. COLA_RO_2009.pdf

Download attached chart. May be reproduced and circulated within your organization. COLA_RO_2009.pdf

Download attached chart. May be reproduced and circulated within your organization. COLA_RO_2009.pdf

Coverage under the railroad retirement plan is NOT treated as coverage ("active participation") under an employer's retirement plan for puposes of determining IRA contribution deductibilty. Therefore it is not the type of plan that would violate the SIMPLE exclusive plan rule. [see IRC Sec. 408(p)(2)(D)(ii) which define the term "qualified plan" by reference to the active participant rules of IRC Sec 219(g)(5)(A) and (B)] Publication 17 (at page 118) regarding "situations in which you are not covered" by a retirement plan states that "Coverage under social security or railroad retirement is not coverage under an employer retirement plan." Code Section 72® regarding the tax treatment of benefits (distributions) from such plan would not appear to be relevant to this discussion.

Amounts deferred by an employee under a Section 125 cafeteria plan are not treated as SIMPLE-IRA compensation. See SIMPLE-IRA LRM (section 15). [iRC 408(p)(6)]

Yes. An HSA may pay or reimburse qualified medical expenses of a non-HDHP covered dependent (as defined in Code Section 152), to the extent that the amounts are not compensated for by insurance or otherwise [iRC 223(d)(2)(A)]

Maybe. We have discussed this before in this forum and never came to a firm conclusion. Arguably, it may cause discrimination under 408(k)(3). No guidance in the SEP area has ever been provided. In the QP area, such a change may cause discrimination if "prohibited group" members were not eligible to participate (under the new amendment provisions) at the time the plan was originally established and new employees are subsequently hired. See Rev. Ruls. 73-382 and 70-75. The IRS had also approved a few prototype SEP plans which allow current employees to participate, notwithstanding a service requirement. It is my understanding that such provisions will have to be removed when the plan is next amended.

Sieve, nice reply. Elective contributions under 408(k)(6) are now excluded from a participant's gross income under Code Section 402(h). As a general rules, all SEP contributions (including excess elective contributiuons)are treated as employer "annual addition" contributions under Code Section 415 (rather than as "employee contributions"). [see Treas. Reg. Secs. 1.415©-1(a)(2)©, 1.415©-1(b)(1)(ii), 1.415©-1(b)(2)(i), 1.415©-1(b)(6)(ii)©]

TREATISE, SIMPLE-SEP-SARSEP-ANSWER-BOOK Q 4:66 Are SEP IRA and SIMPLE IRA plans subject to the ERISA bonding requirements? Maybe. In most cases, an employer that handles funds or other property belonging to an ERISA plan (see Qs 4:1, 4:26) is required to be bonded. The basic standard is determined by the possibility of risk of loss in each situation; thus, it is based on the facts and circumstances in each situation. The amount of a bond is determined at the beginning of each year. It may not be less than 10 percent of the amount of funds handled, and the minimum bond is $1,000. Contributions made by withholding from an employee's salary are not considered funds or other property of a SEP IRA or SIMPLE IRA plan for purposes of the bonding provisions as long as they are retained in, and not segregated in any way from, the general assets of the withholding employer. Because employer contributions are made into traditional or SIMPLE IRAs established by each employee (which are outside the control of an employer once made), bonding would not generally apply. [ERISA §§404©, 412; DOL Reg. §§2510.3-3, 2550.412-5] A payroll deduction IRA is not subject to the bonding rules, provided the arrangement is not treated as a pension plan (see Q 4:26). Bonding exception: An exception to the bonding requirement generally applies for a fiduciary (or a director, officer, or employee of the fiduciary) that is a corporation authorized to exercise trust powers or conduct an insurance business if the corporation is subject to supervision or examination by federal or state regulators and meets certain financial requirements. The PPA provides an exception to the ERISA bonding requirement for an entity registered as a broker or a dealer under the Securities Exchange Act of 1934 if the broker or dealer is subject to the fidelity bond requirements of a self-regulatory organization (within the meaning of the Securities Exchange Act of 1934). Effective date: The bonding exception provision is effective for plan years beginning on or after 2007. [PPA §611(c); ERISA §412(a)(2), as amended by PPA §611(b)] In addition, the PPA raises the maximum bond amount from $500,000 to $1 million in the case of a plan that holds employer securities. A plan would not be considered to hold employer securities within the meaning of this section where the only securities held by the plan are part of a broadly diversified fund of assets, such as mutual or index funds. Effective date: The bonding provisions relating to employer securities is effective for plan years beginning on or after January 1, 2008. [PPA §622(b), ERISA §412(i), as amended by PPA §412(a)] The taxpayer's obligation under the bond must be secured by a surety, and the company acting as surety on the bond must hold a Certificate of Authority from the Department of the Treasury, Financial Management Service. These companies are listed in Treasury Department Circular 570, Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies. [Circular 570 is available at www.fms.treas.gov/c570/c570.html#certified; see also DOL Adv. Op. 2004-07A (July 1, 2004), addressing technical bonding issues and exceptions for certain corporations]

Please explain exactly how this business was created and organized. Who owned/owns wha?. What was acquired? Does old business still extist, why not. What are relationships? Why not have new employer adopt the existing plan? Old employer could withdraw. Is this a predecessor/sucessor employer? See IRC Section 414(a)(1) and (2).

Sounds like a new owner of an existing employer that already has a plan. Seems like the existing eligibility rules under the existing plan would keep the new employees out for 2 years. Please clarify(if needed). Hope this helps.

Absent provisions in the salary deferral agrrement to indicate otherwise, the new mother will participate immediately her return.

No. An IRA-based plan cannot not be amended into a qualified plan. If the qualified plan is adopted the SIMPLE-IRA contributions become excess contributions and are (arguably) treated as wages under the Code. However, under the EPCRS (see section 6.10(5) of Rev. Proc. 2006-27) the excess contributions can arguably be retained or returned to employer (as specified therein).

You are correct (maybe). It would appear the employer first became ineligible in 2002 (had 101 employee), but treated as an eligible employer for two more years (2003 and 2004). It was again an eligible employer in 2003 with only 93 employees. It next went over in 2004, so it was good through 2006. However, you may have to count heads again (1999-2001 and 2003)--all employees are taken into account for purposes of the 100 employee limit (not just those earning over $5K). Have you explored both Code and EPCRS corrections to determine which is better for client (under audit). Be sure to read the audit cap sanctions-section 14 of Rev. Proc. 2006-27, and section 6.10(5) regarding excess amounts under a SEP or a SIMPLE IRA plan. Hope this helps.

Only if the plan year is also first amended to end on December 31 and no 401(k) contributions made for the 2009 plan year. The short plan year could also cause other complications (and additional costs to be incurred). If the 401(k) were limited to collectively bargained employees a special rule permits both plans to exist at same time (assuming the SEP excludes such employees).

It depends. In general, PS contributions are reduced by allowable deductionsd to the SEP. Since employer SEP contributions were made, but not allocated to all eligible employees, the SEP has already violated the uniform allocation formula and is discriminatory. If fixed under the Code, the amount should be reported as wages, not deducted, and corrected (remove excess contribution, adjusted for gain/loss) by the due date of the return (to avoid 6% penalties). The gain is taxable and may be subject to a 10 percent penalty. Alternatively, the employer can fix the SEP problems under the EPCRS by making restoritive contributions (with interest) to employees. Perhaps a SEP (integrated), would have been far less costly to administer than a comparable ordinary profit-sharing plan. Why did the CPA think the profit-sharing plan was better (for this client)? Higher contributions? Ability to include more people?

SIMPLE IRA contributions are made for plan years (which must be the calendar year), not for fiscal years. That being said, the deduction is delayed for fiscal year taxpayers. Assuming the the July 1, 2008, contribution is for the 2008 plan year, the amount is reported and the deduction is claimed on the 2009 tax returns (the taxable year in which the plan year ends). Hope this helps.