Setting up a SIMPLE for Domestic Help

[Guest TaxBill]

Was there any IRS ruling on being able to set up a SIMPLE IRA for domestic help? I realize this may sound crazy but a CPA told me that the IRS has created a new rule for setting up a SIMPLE IRA for domestic help? Anybody know of anything?

[Gary Lesser]

OLD LAW: Actually, contributions for household workers have been made in the past. Such contributions are generally not deductible (not generally a trade or business), and possibly subject to a 10 percent nondeductible contribution tax penalty. Believe it or not, the practice was not that uncommon.

NEW LAW: For tax years after 2001, the 10 percent tax has been waived in the case of either a SIMPLE IRA or 401(k) SIMPLE (ONLY). [EGTRRA 637©-(d); IRC Sec 4972©(6).] It does not apply to family members and (Committe Report) is intended to apply only of all applicable employment taxes have and continue to be paid. Under the new law, no inferece is intended to be made with regard to prior law, i.e., whether a trade or business.

[mbozek]

IRS has routinely approved qualfied plans for personal workers...Never heard of the issues you raise. Sometimes the workers are employed by a separate corporation.

[Gary Lesser]

Then they are not household workers as envisioned by the legislation but employees of some "other" employer (performing some essential duties (no doubt)). What you suggest may possibly raise many other issues that only Derrin Watson could answer (e.g., compensation, employment, FICA, FUTA, SECA, deductible business and personal expense issues).

[Guest TaxBill]

So in laymens terms it would be possible to open a SIMPLE SRA plan for these individuals or would it not? I'd assume a Traditional IRA or Roth IRA would be the only appropriate retirement account for this type of situation in accordance with the IRS regulations? I don't mean to be a pain, I'm a bit confused.

thanks

[Gary Lesser]

Household workers (non-family) may generally be covered under a simple plan to the extent they are employees of the household. To the extent of their being employed by some other employer (a corporation you say) (not the household), the rules would differ depending on your facts.

The IRS has little guidance on when a household worker is employed by a trade or business--the new legislation is a partial work around.

[Gary Lesser]

The IRA used for a SIMPLE IRA must be a SIMPLE IRA.

[mbozek]

Gary: IRS has routinely approved qualified plans for non trade or business employees -- all applicable taxes are withheld by the employer.... I dont think deduction of contributions is a big issue.

[Gary Lesser]

I thourougly agree. But, except for a SIMPLE after 2001, are the nondeductible contributions subject to a cummulative nondeductible excise tax? I do not believe that issue has been answered definitively.

[Guest Fishchick]

I think that what everyone is trying to say is that it's theoretically possible, but that the employer would not be entitled to deduct any of the employer contributions.

[Gary Lesser]

It IS possible and is being done. But, the the nondeductible contribution (except for a SIMPLE after 2001) is most likely also subject to a nondeductible (and cummulative) excise tax. Thus, absent correction, the penalty increases each year and for each prior year. Whether, the amount is actually subject to the penalty has not been determined - but arguably it is. When form 5330 is not filed, the Statute of Limitations never starts. So, SIMPLEs after 2001 aside, there are problems, past, present, and future.

[mbozek]

Gary: Could you provide any written information regarding the IRS position on this issue. Also can this problem be avoided by using a non profit corporation organized under state law that is not a TXO under the IRC as the employer?

[Gary Lesser]

Unfortunately, there is very little guidance. However, under EGTRRA [Act Sec 637© -- Conf. Comm Report (H.R. Conf Rep No 107-84) and House Committee Report (H.R. Rep No 107-51, pt1)]-it is written---

Explanation of Provision

The 10-percent excise tax on nondeductible contributions does not apply to contributions to a SIMPLE plan or a SIMPLE IRA that are nondeductible solely because the contributions are not a trade or business expense under section 162 because they are not made in connection with a trade or business of the employer. Thus, for example, employers of household workers are able to make contributions to such plans without imposition of the excise tax.

As under present law, the contributions are not deductible. The present-law rules applicable to such plans, e.g., contribution limits and nondiscrimination rules, continue to apply. The provision does not apply with respect to contributions on behalf of the individual and members of his or her family.

No inference is intended with respect to the application of the excise tax under present law to contributions that are not deductible because they are not made in connection with a trade or business of the employer.

As under present law, a plan covering domestic workers is not qualified unless the coverage rules are satisfied by aggregating all employees of family members taken into account under the attribution rules in section 414©, but disregarding employees employed by a controlled group of corporations or a trade or business.

It is intended that the provision is restricted to contributions made by employers of household workers with respect to whom all applicable employment taxes have been and are being paid.

Effective Date

The provision is effective for taxable years beginning after December 31, 2001.

[Gary Lesser]

Please explain how the individual is employed for TXO yet performs household duties for an unrelated employer (not generally treated as a trade or business). A prohibited transcation could result - see IRC Sections 503(a)(1) and 503(B). Would the owners pick up the value of the services in income? Who's really the employer????.

That being said, if the "TXO museum" needs cleaning, then it wd be okay. Also, an individual can not be summarily deemed an employee of one entity when they actually perform services for another entity (the household). Including "nonemployees" in a plan could cause plan disqualification (or excess nondeductible contributions in a SEP).

[mbozek]

Gary: I stated that the employer is a non profit corp under state law (e.g., NY Not for profit Corp. law, sect 201) but is not a TXO under the IRC. It is a taxable entity for IRC purposes. Employees work for non profit er which has contracts to perform services for family members and non related parties. It is no different than hiring a service to clean your home, or cut your lawn, etc., except that no profits inure to the directors or officers of the corp. and there are no shareholders.

[Gary Lesser]

My mistake. Interesting concept. Could you provide me with more info. I assume this is not employee leasing, but more of a Merry Maid-type service.

The employees of the NFP would have to be in a plan (of any type) established by the NFP (they may even establish a profit-sharing plan). NFP employees are not eligible to receive employer contributions from the individual households. While the law is silent on that exact point, it does not appear that these individuals are of the class to be benefitted by the new legislation--as they have an employer that is a trade or business. Traditionally, a domestic servant, in that capacity (as I believe envisioned by Cogress) , is not an employee of another organization.

Hope this helps.