SIMPLE IRA Controlled group

[Guest nlmc18]

A client of ours, who is the owner of his small business, had 2003 earnings of $10,000 and put all of it into his SIMPLE IRA for 2003. Also during 2003, he and his wife acquired a manufacturing business from which they both took a salary, neither one made a contribution to the manufacturing company's 401(k) plan. The manufacturing business had a substantial loss for the year. He ended up with negative income as a result. My questions are:

Since these businesses would constitute a controlled group could he even have the SIMPLE IRA?

Even if he could have the SIMPLE, since he had negative income isn't the SIMPLE IRA contribution he made ineligible?

How do we get the contribution out of the SIMPLE and what penalties apply?

[Gary Lesser]

Although the nature of the compensation was not clearly provided, I believe this will answer the question: The earned income is netted if the businesses are controlled, however, W-2 income is not offset by negative E.I. for plan purposes. Hope this helps.

[Guest nlmc18]

Yes that does help. Thank you.

[pmacduff]

Gary - This original thread relates to my questions, so I thought I'd add on here...We have a potential new client approaching us with a situation where the husband owns a Company (100% we think) & has a 401(k) Plan. Wife is on payroll of the company & either is not eligible or does not contribute. Wife has own LLC where she is the only employee. She contributes to a SIMPLE Plan through her LLC. Can she do this? Since this is a controlled group & the husband's Corp. has a 401(k) Plan, I believe she cannot have the SIMPLE, but I can't find any sites, etc. to back me up. Thanks in advance.

[Belgarath]

See instructions for form 5304, under "Which Employers May Establish and Maintain a SIMPLE IRA Plan?"

http://www.irs.ustreas.gov/pub/irs-pdf/f5304sim.pdf

[pmacduff]

Thanks Belgarath - Sorry to be so dense - I found out that the "Mrs." is NOT on the Company payroll. I don't think it makes any difference - she still cannot have a SIMPLE IRA plan in her LLC, right? I interpret the instructions to say that she cannot have a SIMPLE without covering all employees in the controlled group. But even before that, I think she cannot have the SIMPLE if the Corporation has a 401(k) because of the exclusive plan rule.

[Belgarath]

I agree. Although if in the 401(k) no employee made deferrals and if there were no employer contributions, then I think you could have the SIMPLE. I don't imagine that this is the case here...