SIMPLE Plan Contributions for Self Employed

[Mel Wolfson]

Over the past week, I've exchanged messages with both the editor or TheTaxBook and NATP regarding when contribuitions to a SIMPLE must be made for a self employed individual.

TheTaxBook has been taking the postion based upon IRS publications that a sefl employed individual has until the due date of the return, including extensions, to make the contribution. (see p 13-17 - Author's Comment)

NATPs states that the due date is no later than January 31. They cite sections of the code, IRS pubs and a single court case to support their stance.

Can anyone provide some source of definitive guidance on this issue?

[Bees Knees]

IRS Pub 560 says: “You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year.”

The Pub then goes on and gives the following example:

“You are a sole proprietor whose tax year is the calendar year. Contributions under a SIMPLE IRA plan for the calendar year 2004 (including contributions made in 2005 by April 15, 2005) are deductible in the 2004 tax year.”

Nowhere in the Pub or this example does it say the self employed individual is required to figure out his or her net profit on a monthly basis and then contribute a “salary reduction” equivalent amount to his or her SIMPLE IRA. That would be ridiculous and impractical to make self employed individuals maintain their books on a monthly basis in order to calculate a required contribution that must be made within 30 days of the close of the month. Often times, a self employed individual may not even know if there is a profit for the year to make such a contribution until long after the year is over.

If such a requirement existed, no self employed individual could make SIMPLE IRA contributions because by the time they would know whether there is a profit at the end of the year, it would be long past the 30 day deadline for making such a contribution.

The purpose of the 30 day rule is to prevent employers from hanging on to withheld wages for the entire year before contributing the money into the employee’s retirement account. 401(k) plans have a similar 15 day rule. Nobody cares if the self employed individual waits until the tax return is filed to figure out his or her own contribution and make it.

[Unregistered]

Mel

Bees says that NOBODY cares if the S/E individual waits until the tax return is filed to figure out their contribution and to make it then. That's not true - the IRS does!!

Richard Runyan (a taxpayer) found that out the hard way in Tax Court:

" Section 408(p)(5)(A)(i) requires that the contribution to any SIMPLE retirement account must be made not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made.

In this case, the claimed contribution was in connection with petitioner's self-employed activity. Thus, the last day of the business year for that activity was December 31, 2001. Petitioners, therefore, were required to make their SIMPLE contribution on or before January 31, 2002. The evidence presented by petitioners at trial, which came from Northwestern Mutual Life Insurance Co., the trustee for the trust, shows that the $6,788 payment by petitioners was received on April 25, 2002, and “Payment Processed on 04/26/2002”. That payment, which includes the $5,221 at issue, was not a timely contribution for the year 2001 as a SIMPLE IRA contribution. Respondent, therefore, is sustained. "

The "employer" matching contribution can be made up till the extended due date. The reality is that many taxpayers probably do make the payments late but I think they have the potential for problems if audited by the IRS.

New York Enrolled Agent

[Armando Beaujolais]

"Section 408(p)(5)(A)(i) requires that the contribution to any SIMPLE retirement account must be made not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made."

I wonder how far I'll get if I go around disagreeing with court decisions. What the heck, I'll do it anyway.

From Runyan: "Section 408(p)(5)(A)(i) requires that the contribution to any SIMPLE retirement account must be made not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made."

Section 408(p)(5)(A)(i) requires nothing of the sort. Let's look at what it really says...

IRC 408(p)(5)(A)(i): [an employer must]..."(i) make the elective employer contributions under paragraph (2)(A)(i) not later than the close of the 30-day period...etc., etc."

IRC 408(p)(2)(A)(i) states "an employee eligible to participate in the arrangement may elect to have the employer make payments - (I) as elective employer contributions to a simple retirement account on behalf of the employee, or (II) to the employee directly in cash."

The court decision makes the widely sweeping statement about "the contribution to any SIMPLE retirement account" when the code does make that generalization.

Also note that this was not the central issue with Runyan, that the statement was made as a sort of "by the way," additional justification for the decision.

Not that I'd get far with it, but I believe the court decision is in error on this issue.

[Bees Knees]

Bees says that NOBODY cares if the S/E individual waits until the tax return is filed to figure out their contribution and to make it then. That's not true - the IRS does!!

Richard Runyan (a taxpayer) found that out the hard way in Tax Court:

This is a case where the intent of the law and the interpretation of the court is way out of whack.

Name one other qualified plan that doesn't allow self employed individuals to wait until the tax return due date to make the contribution. Even the IRS Pub acknowledges that.

If that were the central issue, as Armando pointed out, then I would have taken it to appeals where the court would have overturned this ridiculous decision.

I stand by my original statement. Congress did not put the 30-day rule in there to require self employed individuals to do their books and figure out their taxes within 30 days of the close of the tax year so that they can make a SIMPLE contribution. The rule was put their to prevent employers from sitting on employee withholding for a year before contributing it to their account.

I would personally take this to a higher court if IRS ever tried it on any of my clients, and I refuse to re-gurgitate such a ridiculous ruling that has no basis in fact or reality.

[Brad Imsdahl]

The court case cited, Runyan, T.C. Summary Opinion 2006-58, is not applicable to this issue, and therefore, we will not consider it as having any merit.

The sole issue was in regards to whether or not the taxpayer made a contribution to a SIMPLE plan and therefore allowed to deduct the contribution. The IRS audit and court position was that the taxpayer had made a $1,567 SEP contribution, and that the excess $5,221 contribution was not allowed as it exceeded the SEP limitation. The taxpayer then took the position that the $5,221 was really a SIMPLE contribution, and thus as a SIMPLE contribution, it would not have exceeded those limits. Documentation presented at trial characterized the entire $6,788 contribution as a SEP contribution, not a SIMPLE contribution. Taxpayer argued they in fact had executed a proper Form 5304-SIMPLE, although that form was not required to be filed with the IRS, and no copy was presented at trial.

The court reached the right decision based on the wrong conclusion. The taxpayer's account at Northwestern Mutual Life Insurance Co. where the retirement plan contribution was made was set up as a SEP IRA, not a SIMPLE IRA. In prior years, the account had accepted proper SEP IRA contributions.

You can’t just make a SIMPLE IRA contribution to a SEP IRA without going through the proper procedures. A SIMPLE IRA can be set up anytime between January 1 and October 1 of the year for which contributions will apply. Therefore, if the taxpayer is going to make the claim that it is really a SIMPLE IRA contribution and not a SEP IRA contribution, it could not have applied for the year the taxpayer claimed it on his tax return because that was long past the October 1 due date for setting it up for that year.

The court case is a Summary Opinion, meaning no other court can look at it and cite it as a precedent. The taxpayer can’t appeal, and even if he could, he would lose on the correct grounds, not the incorrect grounds the court said.

This is a poor example of a court case to use to support any particular rule. We will, however, consider any other evidence to support a position that self-employed taxpayers are subject to the 30 day rule.

[Mel Wolfson]

I guess its best to play it safe here

The purpose of the 30 day rule is to prevent employers from hanging on to withheld wages for the entire year before contributing the money into the employee’s retirement account. 401(k) plans have a similar 15 day rule. Nobody cares if the self employed individual waits until the tax return is filed to figure out his or her own contribution and make it.

I believe that your interpretation of the intent of the rule is right on but that doesn't mean that the IRS would interpret it that way. The service has made distinctions between various types of plans in the past.

My suspicion is that a "late" contribution by itself would not raise a red flag since the trust fund issue doesn't arise. However, if a return is examined for some other reason, an agent might wish to pursue this as well.

For that reason, I'm going to take the more conservative position from now on and assume that the contribution is due on January 31st.

I guess it just isn't as SIMPLE as what Congress had in mind.

[Mel Wolfson]

Thank your for your interpretation of this case

The court case cited, Runyan, T.C. Summary Opinion 2006-58, is not applicable to this issue, and therefore, we will not consider it as having any merit.

The sole issue was in regards to whether or not the taxpayer made a contribution to a SIMPLE plan and therefore allowed to deduct the contribution. The IRS audit and court position was that the taxpayer had made a $1,567 SEP contribution, and that the excess $5,221 contribution was not allowed as it exceeded the SEP limitation. The taxpayer then took the position that the $5,221 was really a SIMPLE contribution, and thus as a SIMPLE contribution, it would not have exceeded those limits. Documentation presented at trial characterized the entire $6,788 contribution as a SEP contribution, not a SIMPLE contribution. Taxpayer argued they in fact had executed a proper Form 5304-SIMPLE, although that form was not required to be filed with the IRS, and no copy was presented at trial.

The court reached the right decision based on the wrong conclusion. The taxpayer's account at Northwestern Mutual Life Insurance Co. where the retirement plan contribution was made was set up as a SEP IRA, not a SIMPLE IRA. In prior years, the account had accepted proper SEP IRA contributions.

You can’t just make a SIMPLE IRA contribution to a SEP IRA without going through the proper procedures. A SIMPLE IRA can be set up anytime between January 1 and October 1 of the year for which contributions will apply. Therefore, if the taxpayer is going to make the claim that it is really a SIMPLE IRA contribution and not a SEP IRA contribution, it could not have applied for the year the taxpayer claimed it on his tax return because that was long past the October 1 due date for setting it up for that year.

The court case is a Summary Opinion, meaning no other court can look at it and cite it as a precedent. The taxpayer can’t appeal, and even if he could, he would lose on the correct grounds, not the incorrect grounds the court said.

This is a poor example of a court case to use to support any particular rule. We will, however, consider any other evidence to support a position that self-employed taxpayers are subject to the 30 day rule.

I appreciate your insight into this case. May I forward a copy of your analysis to NATP. This was where the issue reemerged for me.

[Bees Knees]

IRC Section 408(p)(5)(A) says, “an employer must (i) make the elective employer contributions under paragraph (2)(A)(i) not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made….”

The court case cited made the blunder of saying that means January 31, 2002 for a self employed taxpayer making a SIMPLE contribution for the tax year ending December 31, 2001.

Number 1, January 31, 2002 is 31 days from December 31, 2001, not 30. So unless the court is making up new math, they made an error with that fact.

Number 2, if they want to apply that code to self employed individuals, then the January 30th deadline (not January 31) would only apply for income earned in December of the previous year. It could not be for the entire year unless the self employed individual earned all of his income in December. To apply that code to a self employed individual the same as it applies to an employee of an employer, you would have to make at least 12 contributions per year based on self-employed earnings on a monthly basis in order to count earnings for the entire year in the equation…just as contributions for an employee must be made on at least a monthly basis. The code says "the 30-day period following the last day of the month with respect to which the contributions are to be made..." It does not say within the 30-day period following the last day of the year with respect to which the contributions are to be made. There is a BIG difference.

See why it is ridiculous to apply that code to self employed individuals?

The court was wrong.

[Unregistered]

Mel - I think you're taking the correct approach.

IRS Notice 98-4

Q. G-5: When must an employer make salary reduction contributions under a SIMPLE IRA Plan?

A. G-5: The employer must make salary reduction contributions to the financial institution maintaining the SIMPLE IRA no later than the close of the 30-day period following the last day of the month in which amounts would otherwise have been payable to the employee in cash. The Department of Labor has indicated that most SIMPLE IRA Plans are also subject to Title I of ERISA, and under Department of Labor regulations, at 29 CFR 2510.3-102, salary reduction contributions to these plans must be made to the SIMPLE IRA as of the earliest date on which the contributions can reasonably be segregated from the employer's general assets, but in no event later than the 30-day deadline described above.

Q. G-6: When must an employer make matching and nonelective contributions under a SIMPLE IRA Plan?

A. G-6: Matching and nonelective employer contributions must be made to the financial institution maintaining the SIMPLE IRA no later than the due date for filing the employer's income tax return, including extensions, for the taxable year that includes the last day of the calendar year for which the contributions are made.

Note the timing difference in Q5 & Q6. Also note that for purposes of a SIMPLE, a self-employed person is treated as an employee for purposes of the elective employer contribution §408(p)(6)(B) referencing §401(c(1). Further note, the code distinguishes the matching contribution for S/E so as not to be treated as an elective contribution §408(p)(9).

Bees writes- "Name one other qualified plan that doesn't allow self employed individuals to wait until the tax return due date to make the contribution." What does that prove? Bees - you're much too smart to write that.
I could ask - Name one other qualified plan that provides for a 25% premature distribution penalty. Of course, there is none other than the SIMPLE. The question proves nothing.

New York Enrolled Agent

[Bees Knees]

Notice 98-4 does not address the issue. It says salary reduction contributions for employees must be contributed within 30-days. It does not talk about self employed taxpayers being treated as employees in the context of the 30-day rule. The context of treating self employed individuals as employees applies to the calculation of the contribution, not the due date for making one.

Nothing in the code nor the notice addresses the timing of the contributions as it applies to self employed individuals. You only reach that conclusion by interpretation in a round about way. IRS Pub 560, however, is very clear and directly addresses the issues by giving the example of when a self employed must make the contribution. It specifically says the contribution must be made by the due date of the return, and leaves out any mention of splitting the contribution in two parts, one for the 30-day rule and one for the tax return due date rule....I think that is key, because it is the only source that specifically talks about the contribution due date as it applies to self employed people, other than the screwed up court case that errored on a number of grounds.

[Bees Knees]

BTW, Section 401(c) is talking about treating self employed individuals as employees in the context of setting up qualified retirement plans under the tax favored rules that apply to qualified plans. The self employed individual is treated as an employee under the context of those rules. It does not say the self employed individual is an employee for all qualified plan purposes, because we know there are many rules under the qualified plan rules that treat self employed individuals differently. The calculation of the contribution for one is different. Employees for example, base their contribution as a straight percentage of W-2 wages. Self employeds base their contribution as a percentage of net profits after first reducing profits by the contribution amount and one half of self employment tax. Nobody can say a self employed person is an employee under those rules.

The point is, Section 401(c) does not say self employed individuals are employees with regard to the contribution due dates.

[Unregistered]

Bees

You say Pub 560 leaves out any mention of splitting the contribution into parts. Maybe, you have an old copy. This is what my copy says:

Time limits for contributing funds.

You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year.

One final thought regarding IRS pubs - as the Courts have often noted "Administrative guidance set forth in an informal IRS publication is not an authoritative source of Federal tax law and does not bind the Government. Taxpayers rely on such publications at their own peril."
I'll stick with the code & notice 98-4 which mirrors the code and where the informal Pub 560 tells taxpayers to look for guidance.

I won't say anymore . I don't want to increase your blood pressure.

New York Enrolled Agent

[Bees Knees]

Ny Ea

I enjoy the debate and always respect your posts. It does not raise my blood pressure.

As to IRS Pubs having little authority, same is true for Summary Opinions.

We will leave it at that and see if anything new pops up to tip the scale one way or the other....

[Mel Wolfson]

PPC Interpretation

NATP sent me an extract from PPC where they indicate that their interpretation is that the employer contribution is due by the end of January. The key paragraph states:

Observation: Under the timing rules for making contributions, it appears the self-employed owner's elective deferral must be deposited no later than 30 days after the end of the tax year since the self-employed owner's income is deemed earned as of the last day of the year. The company match, however, need not be made until the due date, including extensions, of the return for the year to which they relate.

Note that they qualify their interpretation by using the expression "it appears".