SIMPLE IRA for an LLC owner

[Guest Elfman]

Since an LLC owner does not receive w-2 compensation (just pass-thru comp), you will not know until the year end what amount should be reported as income, and hence what income to match. Are there any restrictions for an owner of an LLC to fund their account with the employer money throughout the year, before they know what the year end income will be? Or if they overfund, do they just have to take a distribution prior to the tax filing due date (like a traditional IRA)?

Please advise. Thank you!!!

[Bird]

No requirement to fund during the year; I'd suggest waiting until after the end of year to let the dust settle.

[Guest Elfman]

Thank you for your response. However, the person would like to fund it throughout the year and would rather not wait until year end.

Are there any restrictions for an owner of an LLC to fund their account with the employer money throughout the year, before they know what the year end income will be? Or if they overfund, do they just have to take a distribution prior to the tax filing due date (like a traditional IRA)?

Thanks,

[Bird]

There was a fairly recent IRS directive about pre-funding contributions, e.g. matching contributions, before the comp and deferrals on which the match is based are earned - you can't. I don't remember the format in which it came, nor do I remember if it specifically addressed partnerships, where money is effectively earned on the last day of the year. For now I'll hope someone else chimes in but if there's no response in a couple of days bump it and I'll see if I can find it.

[Gary Lesser]

Bird, can you locate the recent info mentioned in your prior post.

It should also be noted that if the individual quits an excess could result.

Elfman, will the maching contributions be allocated to all employee's or, if in accordance with plan provisions, just the owner's account in advance?

[Bird]

There's something in the new 401(k) regs about (prohibiting) pre-funding. I thought there was something else, like a notice that described a specific fact pattern, but I can't find it. But...since this is a SIMPLE it doesn't apply?

[Gary Lesser]

It is my understanding that the IRS will be issuing more guidance on this subject. The guidance will likely treat such set asides as coming from a partner's drawing account (which may or may not be treated as earned income when the books are settled). I do not think that the IRS interprets the new regulations so as to prevent partners from setting aside elective amounts throughout the year. It will be interesting to see if matching/nonelective amounts can be contributed before a final "earned income" determination is made.

[Guest Elfman]

Both of you, thanks for your comments-I appreciate the help.

Hi Gary,

The employer will match the employee contributions throughout the year. They are just not sure if it is proper to contribute throughout the year for their own accounts. If they contribute too much, and have to take an excess distribution, they would be OK as long as that happened by mid March, right?

Thanks,

Elfman

[Gary Lesser]

I don't think that the IRS intended any change in this regard, but we may have to wait for guidance (which will be forthcomming) on the matching/nonelective contribution issue. Keep in mind that the IRS has stated (verbally) that a contribution of one cent more than is allowable invalidates the entire arrangement for the year. [iMO, that is not the result.] The guidance will be issued none too soon!

Any excess is not deductible on the self-employed's Form 1040 (and included in box 1 of Form W-2, if a CLE--see W-2 instructions) and the amount should be removed from the IRA. Beyond that the rules are very merky. For example, the 6% excess contribution penalty applicable to excess contributions to traditional IRAs do not seem to apply to a SIMPLE IRA. If left in the IRA what happens?

IMO, Congress erred in not providing for the return of excess contributions OR the traditional IRA excess rules apply (IRC 408(d)(5) and (d)(6)--see IRC 408(p), a simple retirement account means an IR plan as defined in section 7701(a)(37). It also erred in not making simple IRAs subject to the 6 percent penaly. Personally, I think the IRA rules apply (and Congress needs to make excess subject to the 6% penalty). As I said, we need more guidance (and getting it is not likely).

Hope this helps.

[Allen Tanner]

Does this information hold true today, over 10 years later Bird? Garry Lesser you mentioned the IRS may issue guidance. Do you have an update?

[Bird]

Mmm, I thought I just started on this board about 4-5 years ago? LOL.

I'm not aware of anything new. I would want to be very sure of anticipated comp before funding. I've been involved with a few SIMPLEs and they are generally a royal pain; don't need overfunding to make it worse.

[spiritrider]

Personally, I don't see the risk/reward benefit. The maximum match/non-elective contribution is 3%. How much difference can there really be making employer contributions during the year vs. at tax filing time.

Fine for W-2 employees or yourself as an S-Corp share-holder employee. You have a direct calculation from the W-2 wages. For someone taxed as a sole proprietor or partner, it just makes no sense to me.

[Joe A]

Can someone help me confirm that ‘compensation’ of an LLC Manager (for simple IRA purposes) includes guaranteed payments and fringe benefits (health insurance premiums paid by the LLC). ?

many thanks  

 

 

[Flyboyjohn]

I'd look at the number he's putting on his Schedule SE (earned income for self-employment tax purposes)