Self-employed SIMPLE and catch-up

[taxdk]

If a person is both a self-employed individual and a W-2 employee who's eligible for self-employed SIMPLE IRA catch-up, is the catch-up limited by net self-employment income, or can she use her W-2 compensation in adding on the catch-up beyond the net self-employment income? In this example, no retirement plan contribution through W-2 job, but her net-self employment is only about $3000.

That is, can she add on the SIMPLE catch-up of $2,500 on top of the approximately $3000 SIMPLE deferral, by virtue of her W-2 compensation?

IRS and other reference materials (including TaxBook's Pension Plan Limitations chart) use the generic phrase in describing the SIMPLE and other retirement plan deferral or catch-up contributions as being "limited to the lesser of (applicable amounts per plan)..., or 100% of a participant's compensation for the year."

From a conservative perspective, I would think "participant's compensation" would be compensation from a particular job for a particular plan - that is, net self-employment for the SIMPLE is the limiting factor, therefore no catch-up beyond max deferral.

Yet my tax software allows the addition of the catch-up in the above situation, and I wonder if that's because her W-2 compensation figures into the situation?

Thanks,

Taxdk

[Bees Knees]

TTB, page 13-17 provides an example of how to figure the maximum amount for a self-employed individual:

Example: Tony’s share of profits on his 2010 K-1 from QFZ Partnership is
$90,000. Tony elects to defer $10,000 to his SIMPLE IRA. Compensation
for purposes of the employer’s match is $83,115 (line 4, Schedule SE).
Assume QFZ Partnership makes 2% nonelective contributions for all
partners and employees of QFZ. The employer’s 2%
contribution for Tony is $1,662 ($83,115 × 2%). Tony’s
K-1 shows $11,662 on line 13, code R, and he deducts
that amount on line 28, Form 1040.

Note that compensation for a self-employed individual is equal to line 4 of the Schedule SE. This statement agrees with IRS Pub 560 page 9 which says:

If you are self-employed, compensation is
your net earnings from self-employment (line 4,
Section A, or line 6, Section B, of Schedule SE
(Form 1040)) before subtracting any contributions
made to the SIMPLE IRA plan for yourself
and without regard to any deduction for
self-employed health insurance.

If you look at code Section 414(v), which is the catch-up contributions for a SIMPLE IRA, it says the catch-up contributions are also limited by the compensation of the individual. Thus, you cannot add W-2 earnings to self-employed earnings to figure the max SIMPLE IRA. Of course, the W-2 employer can also set up a SIMPLE plan for employees and use the W-2 earnings to figure contributions to that plan.

[Lion]

2%

How would the partnership know what will be on the individual's SE line 4, not knowing SEHI, for instance? So, how can the partnership determine the correct 2% (or in my client's case, the 3%) matching amount?

[Bees Knees]

The example is used to determine how much the partnership must contribute for purposes of the employer matching amount. Thus, the partnership would have to assume the partner's SE income is the only SE income flowing to the partner's Schedule SE. Any other SE income flowing to the Schedule SE would be irrelevant as far as what the partnership should use to calculate the employer matching amount.

[Lion]

Thank you

Thanx, Bees.

[taxdk]

Thank you Bees Knees, but why doesn't software cap...

....the SIMPLE IRA contribution so catch-up doesn't apply if W-2 income isn't added to net self-employment income in defining compensation in this case?

A rhetorical question not needing an answer here, and perhaps one to be asked of the software company....

Thanks again,

Taxdk