S/E contribution calcs for SIMPLE vs DC plans

[Dawn Hafner]

The definition of compensation for S/E individuals relating to SIMPLES is different than that of qualified plans. The SIMPLE definition found at IRC 408(p)(6)(A)(ii) refers to "net earnings from self-employment" (line 4 on Schedule SE)

It then goes on to say "without regard to any contribution under this subsection"

What does "without regard" mean?

Without regard - therefore ignore the SIMPLE matching contributions as if they are not made (i.e. include the matching in eligible comp to determine the matching)?

OR

Without regard - therefore back out the SIMPLE matching contributions to get net comp - similar to the normal S/E calculation?

The normal S/E calc is determined by following IRC 401©(2)(A). In section (iv) it states "without regard to items which are not included in gross income for purposes of this chapter (401). Here it appears that "without regard" means back out the qualified plan contributions to get net comp to determine the qualified plan contributions, in other words the usual circular calculation.

In the IRA Answer Book (Gary are you out there?) it appears that they interpret 408(p)(6)(A)(ii) "without regard" to mean to include in eligible comp those SIMPLE matching contributions.

Anyone covered this ground yet?

I understand that when determining S/E comp there is no requirement to back out 1/2 of the S/E tax as the earned income definition in 401©(2) does not apply to SIMPLEs.

[This message has been edited by Dawn Hafner (edited 03-23-99).]

[Gary Lesser]

Dawn,

Yes QP & Simples have different definitions of earned income (in the case of an owner of an unincororted business). Although the four possible reductions applicable to qualified plans do not apply in the case of a Simple-IRA; the IRS seems to be of the opinion that the "in-lieu" of deduction found in IRC 1402(a)(12) does apply. Thus, e.g., with pre-plan Schedule C income of $10,000, only $9,235 wd be used for plan and matching contribution purposes in a Simple IRA.

Both of these issues, the 92% reduction and the 1/2 of SE tax (and so on) were discussed not too long ago. Extent the period that mesages are retrieved.

Hopethis helps. Gary

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[Dawn Hafner]

Gary,

I understand the 92% vs the 1/2 of the 164 reduction. My question relates more to the matching contribution. Why don't you back out this matching contribution when calculating the total contribution, similar to a qualified plan?

What cite tells me that you don't reduce net earning by the match? The wording of "without regard" in 408(p)(6)(A)(ii) seems to indicate you back out the match. Is there anything from the IRS that goes through their calculation of a SIMPLE IRA for a S/E person?

Thanks.

[Guest Steve Hample]

Good question Dawn. Last year at this time even more confusion existed. I agree with your interpretation, but cannot prove it.

E.g. Business owner Steve makes $50,000 of schedule C profit and contributes $6,000 to a SIMPLE under at 3% matching plan. The $6,000 now obviously goes on the front of the 1040, but what about the $1,500 proprietorship business match? Looks to me like the best place to report this $1,500 is as a pension expense on Schedule C, along with matching expenses for Steve's employees.

Related question: See any problem in mom and pop businesses where in past years mom has not drawn any earnings, but now decides to draw $6,000 of eanings and sock it all away in a SIMPLE account?

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Steve Hample

[Gary Lesser]

Dawn:

Backing out the match just isn't required under 408(p)(6) as it is in the case of a Keogh-type plan under Code Section 401©; "without regard" means to ignore it; thus $50,000 is the starting number that (according to IRS) must be multiplied by .9235% (IRC 1402(a)(12)). The owners contributionS are both claimed on his/her 1040. CLE contributions on Schedule C. Keep in mind that 401© DOES NOT apply to a Simple plan.

Steve: As long as Mom is really an employee and she's eligible to prticipate she can defer her $6,000 of W-2 income and receive a match too.

[Guest Steve Hample]

Dawn and Gary - thanks for the pointers.

New related question: multiple sole prop. businesses - SEP plan for one

Client is dabbling in three areas, sole proprietorships, trying to decide what will work. Rules exist re controlled groups and not exceeding maximums for the individual but here's a different wrinkle. He has no employees. In prior year he started a SEP for business one and is testing ideas for businesses 2 & 3. His pre plan schedule C's are:

Business 1: Profit of $30,000

Business 2: Loss of $5,000

Business 3: Loss of $5,000

His maximum SEP contribution is 13.04% times ($30,000 less self empl. tax adj)

OR

His maximum contribution is based on the net of all businesses which is 13.04% times ($20,000 less slf empl tax adj)

I'm betting a cheap beer on the first approach and guessing we should consider only Business 1. The controlled group concept says the benefit must be offered to employees of the other businesses, but nothing requires them to sign up and declare negative earnings.

A CPA guesses otherwise because of his software - which seems to me to do a simplistic error check using only the net totals on the 1040.

If you can resolve this, the CPA and I will both buy you a beer.

Steve

[Dawn Hafner]

Look at IRC Section 404(a)(8)(D). "reference to earned income of such individual derived from the trade or business with respect to which the plan is established."

My CD Rom isn't working this morning, so you may want to check and see if the regs under 404 further explain this section.