Bill Berke

I think that your deduction is limited to the deferrals and matching during the employer's fiscal year beginning 4/1/00 to 3/31/00. If I'm correct, then the deduciton is limited to the 9 months of 4/1/00 through 12/31/00 - deductible on the 3/31/01 return. The deferrals and match for 1/1/00 through 3/31/00 were deductible on the 3/31/00 return. If the match was not made with each payday, but was held to the end, then I think it would be deductible on the 3/31/01 return. If there are no deferrals during 2001 and the SIMPLE has been publicly cancelled, then I think you could have a short year MPP for 3/31/01. Code section 408(p)(2)(D) (the excusivity paragraph) refers to "contributions that were made for service". So if nothing happens in 2001, there are no contributions/deferrals for service, then there is no plan. And I could be so wrong it is scary.

The SIMPLE contributions are not eligible for tax benefits. The law is explicit, SIMPLE is the only plan allowed. My answer to "what now?" is, I believe, each of the employees must file an amended income tax return for 1999 reporting their deferrals. I believe that for 2000 they can withdraw their deferrals with no harm (and adjust the w-2's) to eliminate the deferral reduction. The match for both years is income to the participants and are reportable compensation for the appropriate year. And the SIMPLE IRAs may be subject to the 6% penalty for the 1999 deposits. What a mess. And, to my knowledge, there is no guidance so I could be all wet. Considering all the income tax issues (individual and company) and the cicumstances, I suggest you go see a lawyer ASAP.

So, to add to your woes, this person with this wonderful loan was a highly compensated employee at the time!!? And how long has this person been an HCE? (this is rhetorical). If you are the plan administrator, get legal help. If you are not the PA, tell the PA to get help. And you have not identified the type of plan - which is also an issue. And the loan documents should define default. So, as I said, considering the Title I and Title II issues, call a lawyer real soon.

Kirk your comment is dead on (again). And you point out one of the fiduciary resposibilties no one considers; whether or not the loan should be granted under the circumstances.

The easy answer; write check. Missing payments as you have descibed is a PT. However, perhaps structuring the payments quarterly, rather than monthly, may eliminate the problem. Although quarterly payments are harder than monthly to operate.

I believe you are corrrect, the employee cannot elect out of the 2%. But, then why not evaluate switching the formula? Is the 2% cheaper than the match formula? Or is this a company philosophical decision to benefit all eligible employees?

It is possible for either the S-corp or the LLC to adopt a plan. Very likely okay in the LLC, questionable in the S-corp. But, you don't give nearly enough facts that must be considered like controlled group/affiliated group issues regarding the other owners and their employees

a) To the extent the employer's contribution is less than $2,000, the employee can deposit the difference into the SEP-IRA. b) On the payroll records of the employer, You may want to re-classify the employee's contributions as employer contributions (no one got more then 15% of pay in your facts) and repay the employee deferrals as additional income. The employer would get the benefit of clasifying and deducting the employee's erroneous defferals as employer contributions. Then you would have to true-up the overall employer contribution to comply with the allocation fomula in the SEP document. But this should make everyone whole, albeit you may end up with an employer contribution greater than desired. c) Another choice may be to withdraw all the employees' deferrals as contributed erroneously and then adjust everyone's payroll records to reflect the eliminated deduction. This may be trickier (or easier) than choice one because of the various possible legal issues and the required reporting on IRA distributions (1099 etc.)that the trustee must file and the employees must explain on their individual tax returns.

I strongly believe you cannot amend a 401k into a SEP. One is a qualified plan (401k), the other is a series of IRAs under IRC 408 (not qualified). I think you must formally terminate 401k plan first. And you have to coordinate deducton/contribution timing rules and limitations when you switch plans and deal with the accounts of a termnated 401k plan where the employees are still working for the same employer.

I view safe harbor as an alternative to the ADP testing requirement. It is not a change in the 401k rules. Ergo, the one year requirement applies.

It is the employer's responsibitiy to make all reasonable efforts to find a former employee who is due benfits. At the least, in our practice, that means mailing a regular and certified letter to the last known address and then, if necessary, using the IRS's and SSA's letter forwarding service. The threads mentioned by Dave all go into much better detail and should be read. But it is the employer's responsibility that all reasonble means were used and this is serious issue with gov't.

I believe that the costs of preparing and handling an IRS audit are plan expenses. From what I've read and discussed, the DOL focus is on making sure that expenses which benefit the employer-settlor are not charged to the plan. The annual CPA audit is a proper plan expense so similarly, I believe, these IRS audit costs are plan expenses. However, the plan must get a no-change letter or I'm singing a very different tune.

I agree that the reg only goes to segregation from employer assets. But, what/why would it take so long to then allocate to specific accounts? Anything longer than a couple of days is probably a general fiduciary breech. Certainly the multitude of financial institutions can allocate within a day or two (if not sooner) and that may be the standard to which this employer will be held. And, in addition to the interest allocation, I have lots of fiduciary liability questions regarding who gets what if the participant selected investments go up or down during the period this money is sitting around waiting for a clerk to do an allocation. I think this is a landmine. Any ERISA lawyers care to comment? The DOL has verbally said at some conferences that even if it was the vendor holding the money, this is a no-no and it is an employer fiduciary breech for allowing delayed allocations.

P.A. Weick is correct - run to the nearest lawyer. If you are comfortable with your divorce lawyer you could start there. Or if you have a general or business lawyer ask him/her for a referral. But RUN

Document would have to permit this and the implications are that this is a participant directed account, and that this is not being done with employer contributions. If so this is okay. But as mentioned above, the number of people doing this may create state or federal securities laws issues. And the stock is purchased for its current market value and the same purchase terms are available to all in plan.

From the few facts, I believe that you do not have a controlled group - but more facts are needed. I could conceive that you may be an affiliated service group - but, again, more facts are needed. One of the experts in this area is S. Derrin Watson. Perhaps you could find one of his articles somewhere else on Benefits Link or through ASPA

The DOL is on a campaign to educate employers as to their fiduciary duty to segregate plan assets from corporate assets as soon as feasible. Of course being the gov't they use a hammer and disregard the poor job of education the DOL has done in the past. This means that an employer with one payroll must get the money into the trust within three or four days after payday. See the DOL regs. The problem that is being discussed is that once an employer establishes the transmittal time - say two days - if the employer takes five days on occasion, that is a violation of its own standard. Ridiculous, yes, imho. However, the atty's I talk to all agree that the employer with one payroll really better get the money in within two or three days after EACH payday. When you have a plan with late deposits, you could take advantage of DOL's VFC, which prescribes the interest calculation on the late deposits and should be used if the amounts involved (including possible penalties) are "significant". Att'ys will tell you to use VFC almost all the time, but I tend to be somewhat practical and "significant" to me is a variable based upon facts and circumstances.

In addition to the controlled group rules (and ownership ideentification), you may have to consider the affiliated service group rules - depending upon whether your home biz works with the inc.biz and how they work together. As you can tell, we need more facts to help further.

Deferrals must be deposited during the calendar year. The tax problem is that no one can determine earned income until the last day of the year. So, theoretically one is guessing as to compensation for retirement purposes. But in my experience, most self-emplyed individuals can estimate income based upon prior experience. And this should not be a problem for self-employed person with a reasonable expectation of at least $6000 of earned income.

IRC Section 408(p)(5)(A) requires that elective deferrals must be deposited not later than the close of the 30-day period following the last day of the month in which the deferrals were made. But, I think if an employer routinely waits that long they will be in trouble. I'm not sure if SIMPLE plans come under Title I which would mean that the DOL rules would apply. But even if the plans are not covered by DOL, I would recommend following those rules. The matching contribution may be deposited on the due date of the return (including extensions). I think you need to be careful to not confuse which type of contribution you are dealing with. The law does not distinguish between self-employed and common law employed

It is my understanding that IRAs, SEPs and SIMPLEs do not get protection of 401(a)(13). Thus, these account are part of the person's bankruptcy estate which limits the protection to state rules. A profit-sharing plan's assets are protected if it is an ERISA qualified plan

I agree with your comment, but you can now read the final reg's, which, I believe say ignore the interest accrued.

The only person I know of who can rollover a distribution is a spouse or ex-spouse. You said non-married, so I say no rollover.

I am not a lawyer, but it is my clear understanding that the buyer instantly assumes all liability for all past errors upon the moment the buyer adopts the seller's plan. I have seen payment holdbacks as part of the sales contract to cover unknown contingencies such as this. Obviously the plan must be fixed. It is immaterial whether a deduction has been taken, operating a plan correctly is a fiduciary requirement and the buyer just became a fiduciary.

I'm the late commentator. I agree with everything Phil said. The exact corporate set-up and its relationship to the parent/affiliate is material. Also, as Phil mentioned, which I cannot over-emphasize based upon my experience, someone better know the controlling tax treaties. The U.K. treaty is the one that has the broadest familiarity in the U.S. and that treaty has some amazing twists and loopholes for the two countries' citizens. For example, pension distribution tax rate is affected by where the money was earned (and taxed) and where the person retires. If all the income is paid in the U.K., I was told by international tax lawyers that the income does not count for U.S. domestic retirement plans even though the person may get creditted for hours of service outside the U.S. for all purposes of the plan.