PORTFOLIO

SEPs and SIMPLEs (Portfolio 368)

Tax Management Portfolio, SEPs and SIMPLEs, No. 368-2nd, analyzes the rules that apply to simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE plans). This portfolio explains that a SEP is a retirement plan sponsored by an employer through which the employer makes contributions to the traditional IRAs of its employees. Although the rules applicable to traditional IRAs apply to employer contributions once they are made, separate eligibility, contribution amount and other rules apply to the SEP.

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DESCRIPTION

Tax Management Portfolio, SEPs and SIMPLEs, No. 368-2nd, analyzes the rules that apply to simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE plans). This portfolio explains that a SEP is a retirement plan sponsored by an employer through which the employer makes contributions to the traditional IRAs of its employees. Although the rules applicable to traditional IRAs apply to employer contributions once they are made, separate eligibility, contribution amount and other rules apply to the SEP.

SIMPLE IRAs replaced salary reduction SEPs, except for certain grandfathered plans. This portfolio explains in detail the rules that apply to SIMPLE IRAs. In addition, this portfolio discusses the distinctions between SIMPLE §401(k) plans and SIMPLE IRAs, and the application of the SIMPLE plan rules to the establishment and operation of the plan and the traditional IRA rules to contributions after they become assets of the plan.

Finally, this portfolio explains deemed IRAs — separate accounts within a qualified retirement plan that receive voluntary employee contributions that may be treated as traditional IRA or Roth IRA contributions.


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AUTHORS

KATHRYN J. KENNEDY
Kathryn J. Kennedy; Drake University (B.S., with honors, 1974); Fellow of the Society of Actuaries (F.S.A., 1976); Northwestern University School of Law (summa cum laude, Order of the Coif, Article Editor for the Northwestern University Law Review, 1980); Member, Illinois Bar; Professor of Law and Director of the Center for Tax Law and Employee Benefits, The John Marshall Law School; Member of the EP Subcommittee of the IRS TE/GE Advisory Council (ACT); Former Member of the Department of Labor's ERISA Advisory Council; Chair of the Distributions Subcommittee, Employee Benefits Committee of the ABA Section of Taxation; Former Chair of the ISBA Employee Benefits Section Council; Former Chair of the CBA Employee Benefits Committee.

TABLE OF CONTENTS

Detailed Analysis

I. SIMPLE Retirement Accounts

A. In General

B. SIMPLE Plan Establishment

1. Must Be Effective No Later Than October 1

2. Deadline for Opening Employees' SIMPLE IRAs

3. Optional IRS Model Forms

4. Credit for Start-Up Costs

C. Eligible Employers

1. 100 or Fewer Employees in Preceding Year

2. No Other Qualified Plans or SIMPLE Plans

3. Tax-Exempt and Governmental Employers

D. Employee Eligibility

1. Employees Having Compensation Less Than $5,000

2. Exception for § 410(b)(3) Employees

3. Exceptions Are Optional

E. SIMPLE Plan Contributions

1. SIMPLE IRAs Must Be Used

2. Types of Contributions Allowed

3. Salary Reduction Contributions

4. Employer Matching Contribution

5. Occasional Reduction in Required Employer Matching Contribution

6. 2% Nonelective Employer Contributions

7. Tax Treatment of Contributions

8. Inapplicability of § § 415 and 416

F. Employee Elections

1. Annual Minimum 60-Day Election Period

2. Additional or Longer Election Periods

3. Canceling a Salary Reduction Agreement

4. Selection of a SIMPLE IRA Trustee

G. Vesting Requirements; No Withdrawal Restrictions

H. Employer Notification and Reporting Requirements for SIMPLE Plans

1. Notice to Employees

a. Annual Notice of Opportunity to Defer; Annual Summary Description

b. Notice of Reduced Rate for Matching Contributions; Notice of Nonelective Employer Contribution

c. Reporting Penalties and Sanctions

2. Handling Unwilling Employees

3. Reporting to Federal Agencies

I. Requiring the Use of Designated Financial Institution

1. Decision Is Made by the Employer

2. Exceptions to Costless Transfer Requirement When DFI Is Used

3. Costless Transfers Required Monthly

4. When Is a Transfer Costless?

J. Notice Requirements for SIMPLE IRA Trustees, Custodians & Annuity Issuers

1. Information the SIMPLE IRA Trustee, Custodian, or Annuity Issuer Must Provide Annually to the Employer

2. Information the SIMPLE IRA Trustee, Custodian, or Annuity Issuer Must Provide Annually to the Participating Employees

3. Reporting to IRS by the SIMPLE IRA Trustee, Custodian, or Annuity Issuer

K. Tax Treatment of SIMPLE Plans

1. Distributions During the "Two-Year Period"

2. Rollover and Transfer Restrictions

3. Inapplicability of § 401 Qualification Rules

L. Fiduciary Duties

M. Remedial Correction Programs

N. SIMPLE Plans Compared to § 401(k) Plans

II. Simplified Employee Pensions (SEPs)

A. Introduction

B. Definitions

C. Legal Structure of a SEP Arrangement

1. Persons Eligible to Establish a SEP Arrangement

2. Written Instrument

3. Contribution Allocation Formula

4. Permitted Types of IRAs

D. Comparison of SEP Arrangements to § 401(a) Qualified Plans

1. Reduced Administrative Fees

2. No Fiduciary Exposure

3. Withdrawal Flexibility

4. No Administrative Filings

5. No Joint and Survivor Annuities

6. Expanded Eligibility

7. No Loan Feature

8. Active Participant Rule

9. Liberal Contribution Deadline

E. Statutory Requirements of a SEP Arrangement

1. Participation Requirements

a. Minimum Age

b. Service

c. More Than a De Minimis Amount of Compensation

d. Statutory Exclusions

e. Related Employers

f. No Active Participant Rule

2. Nondiscriminatory Contributions

a. Highly Compensated Employees

b. Uniform Relationship to Total Compensation

c. Permitted Disparity

3. Withdrawal of Contributions by Employees

4. Top-Heavy Provisions

5. Domestic Ownership of Assets

F. IRA Rules Applicable to SEPs

G. Employer Contributions Under a SEP Arrangement

1. Maximum Amount Excludible from Employee's Income

2. Maximum Deductible Contribution by Employer

3. Credit for Start-Up Costs

4. FICA and FUTA Taxes

5. Effect on Other Plans

6. Taxable Year of Deduction for Employer

7. Maximum Annual Addition

8. Contributions After Age 7012

9. Salary Reduction Contributions (SARSEPs)

a. Tax Aspects

(1) Annual Reduction Limit

(2) FICA and FUTA Taxes

(3) Excess Deferrals

b. 100% Eligibility Requirement

c. Limitations on Eligible Employers

d. Effect on Other Plans

e. Deferral Percentage Test

f. Top-Heavy Rules

g. Compared to Cash or Deferred Arrangements

H. Employee Contributions

I. Withholding, Tax Returns and Compliance

1. Withholding

2. Reporting Requirements

a. SEP Arrangement Using Form 5305-SEP

b. General Reporting Requirements for Other SEP Arrangements

c. Alternative Method of Compliance

d. Reporting by IRA Sponsor

e. Reporting of Employer Contributions

f. Reporting of Unrelated Business Taxable Income

3. Disclosure to Employees

a. Upon Adoption of SEP Arrangement

b. Annual Statements

J. Obtaining IRS Approval for a SEP Arrangement

1. Reliance by Employers

2. IRS Opinion Letters Concerning SEPs

K. Other Tax Aspects of SEPs; State Taxes

L. Non-Tax Rules for SEPs

1. Creditors' Rights to SEP Assets Under State Law

2. ERISA Considerations

a. Reporting and Disclosure Requirements

b. Fiduciary Rules

3. Federal Securities Law

III. Deemed IRAs Under Employer Plans


WORKING PAPERS

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 IRS Listing of Required Modifications [Language for Use by Drafters of Prototype Simplified Employee Pension Arrangements]

Worksheet 2 IRS Listing of Required Modifications and Information Package for Savings Incentive Match Plan for Employees of Small Employers

Worksheet 3 IRS Listing of Required Modifications and Information Package for SIMPLE Individual Retirement Arrangements

Worksheet 4 IRS Examination Guidelines for SEPs and SARSEPs

Bibliography

OFFICIAL

Statutes:

Regulations:

IRS Announcements:

IRS Notices:

Treasury Rulings:

Cases:

UNOFFICIAL

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