Simple IRA, Again

[geekgirldany]

I am a little confused here. I posted a few weeks ago about a customer possibly over contributing to a Simple IRA. I talked to the investment advisor about it. She said that she was under the impression that the 3% matching is based on his net income from the business (corporation). I told her it wasn't because he is incorporated. It would be based on his W-2. Is this correct? Is it not matching the employee's elective deferrals up to 3% of employee compensation? Add on to that it appears that the Simple is not in the corporation name but the customer's name. Is that correct?

I told her that when the person is a Sole Prop, Sche C that you can take the net income subject to social security taxes to get the matching. I told her that if it is suppose to be 3% of employee compensation then he over contributed for 2006. But that I was willing to pay some of the penalty because I should have caught it.

The reason I am asking you all this is because it seems like the financial advisor doesn't know the rules. I want to make sure I have them straight before I contact her again.

[sea-tax]

My understanding is that that the simple plan must be established in the corporations name, and yes the w-2 income is used to calculate the 3% / 2% elective defferal.

I am sure you have already checked but on the TTB page 13-17 it gives some good information.

[BOB W]

I am a little confused here. I posted a few weeks ago about a customer possibly over contributing to a Simple IRA. I talked to the investment advisor about it. She said that she was under the impression that the 3% matching is based on his net income from the business (corporation). I told her it wasn't because he is incorporated. It would be based on his W-2. Is this correct? Is it not matching the employee's elective deferrals up to 3% of employee compensation? Add on to that it appears that the Simple is not in the corporation name but the customer's name. Is that correct?

I told her that when the person is a Sole Prop, Sche C that you can take the net income subject to social security taxes to get the matching. I told her that if it is suppose to be 3% of employee compensation then he over contributed for 2006. But that I was willing to pay some of the penalty because I should have caught it.

The reason I am asking you all this is because it seems like the financial advisor doesn't know the rules. I want to make sure I have them straight before I contact her again.

Yes, 3% of the employee's compensation. Actually the plan is under the entities name but the contributions go to the individual. In other words the plan is adopted by the employer/entity.

As to you being responsible for the mishaps, I don't think so. Did you provide the $ amount to them?

[geekgirldany]

Yes I read through the TaxBook it does give some very good information. I just wanted to make sure I was reading it right. I studied it enough for the EA Exam I should know it by heart

Well this must have been in his name only all along. Looking at the information it has:

Investment Company
C/O Customer Name
As Custodian for the Customer Name Simple IRA

I am thinking the corporation should be named as the custodian but it is the customer's Simple.

Bob I feel like I should have noticed it. He over contributed around $2,000 for 2006. I didn't tell him the amounts to contribute. When I talked to him about it he says he just sends them money and tells them to put it in for retirement.

I think I will send the advisor a email. She said she was confused. So maybe having it in writing will help.

[sea-tax]

I have a simple for my corp and no where on the employee statement does it mention my
corps name. Only on the paperwork to establish and maintain the plan does the corp's name appear. Have the advisor check the original docs for plan establishment to verify if the plan is in the corp's name or the individual.
Remember the plan is established by the employer but the account is owned / fully vested by the employee the minute the money is deposited into the account.

[geekgirldany]

I've got a email into her to find out this additional information. Hopefully it can be cleared up.

Thank you all for responding.

[geekgirldany]

Update:
Well I got the plan documents. Actually an amendment to the plan made in 2002. It is not a Simple. It is a SEP IRA and the s-corp name is on it. It is marked 25% of compensation and catchup contributions are allow. I am assuming that this was a SAR SEP setup before 1997 because these type of plans are not allowed now.
So it appears that he is okay. $11,600 regular 25% of compensation contribution plus catchup contributions $5,000 (allowed over 50) = $16,600. He contributed $15,500 in 2006. But for 2007 he may have over contributed and needs to take some out.

Interesting the original document says SEP but the information I received in the letter has Simple all over it and this is the rules the advisor was going by... well sorta going by still had it wrong. I have not been able to talk to the advisor just the assistant.

[JoshinNC]

One more example of why it makes sense to do these yourself

Update:
Well I got the plan documents. Actually an amendment to the plan made in 2002. It is not a Simple. It is a SEP IRA and the s-corp name is on it. It is marked 25% of compensation and catchup contributions are allow. I am assuming that this was a SAR SEP setup before 1997 because these type of plans are not allowed now.
So it appears that he is okay. $11,600 regular 25% of compensation contribution plus catchup contributions $5,000 (allowed over 50) = $16,600. He contributed $15,500 in 2006. But for 2007 he may have over contributed and needs to take some out.

Interesting the original document says SEP but the information I received in the letter has Simple all over it and this is the rules the advisor was going by... well sorta going by still had it wrong. I have not been able to talk to the advisor just the assistant.

Veritas, Sea-Tax and I have been speaking of the virtues of being licensed to handle securities transactions. This is just one more example of why it makes sense to do it (along with the added revenues).

[geekgirldany]

Josh I have been thinking about this recently. I have received a few things from HDVest and hope to check out more on their program next year. After I pass my enrolled agents exam I will look into adding investments to services. I have several customers that are in need of retirement planning.

[JoshinNC]

I don't use HDVest, but others on the board love them

Josh I have been thinking about this recently. I have received a few things from HDVest and hope to check out more on their program next year. After I pass my enrolled agents exam I will look into adding investments to services. I have several customers that are in need of retirement planning.

It will be a good addition to your practice.

[geekgirldany]

Just when you think everything is okay....

Just when you think everything has worked out I get a call that it isn't a SEP but is a Simple. So I am back at the same position. Over contributions to the Simple. I finally was able to talk to the main advisor and she basically told me to figure it out and let her know. Shouldn't some of this be her job also since she told him the amount to contribute? Aggg!

[geekgirldany]

Form 5329

Well I think I about have this worked out. The investment person is taking the excess contribution over to 2007. Customer will owe the 6% penalty plus additional tax from the contribution being wrong.

The only thing is on Form 5329 I can't find a place for Simple IRA 6% penalty. Should I just put the excess contribution on the Traditional IRA section of the form? I've researched and just can't find anything on it.

Thanks for any more help on this

[Bees Knees]

Well I think I about have this worked out. The investment person is taking the excess contribution over to 2007. Customer will owe the 6% penalty plus additional tax from the contribution being wrong.

The only thing is on Form 5329 I can't find a place for Simple IRA 6% penalty. Should I just put the excess contribution on the Traditional IRA section of the form? I've researched and just can't find anything on it.

The penalty is 10%, not 6%. You have to use Form 5330. The instructions for Form 5330, under who must file, the 3rd one listed says:

“Any employer who is liable for the
tax under section 4972 for
nondeductible contributions to qualified
plans.”

Section 4972(a) says:

“In the case of any qualified employer plan, there is hereby imposed a tax equal to 10% of the nondeductible contributions under the plan…”

Section 4972(d)(1)(A)(iv) identifies SIMPLE plans within the meaning of Section 408(p) as being a “qualified employer plan” for purposes of the 10% penalty.

Section 408(p) is the rules for SIMPLE IRAs.

In essence, an IRA is not a qualified plan. However, when it is funded by SEP IRA or a SIMPLE IRA contributions, the account becomes a qualified plan that uses a traditional IRA as the account vehicle to hold the contributions plus earnings. The fact that a traditional IRA in itself is not a qualified plan (and thus only subject to the 6% penalty on excess contributions) is irrelevant. A SEP and a SIMPLE are qualified employer plans. Contributions to SEP and SIMPLE plans fall under the Qualified Employer Plan rules. Once the funds are inside the SEP IRA or SIMPLE IRA, it then turns into a traditional IRA and certain IRA rules kick in. However, even then the funds are still considered funds inside a qualified plan subject to other qualified plan rules.

[Bees Knees]

TTB, page 13-5 under Penalties also has this information, listing traditional IRA and Roth IRA excess contributions as subject to the 6% penalty, while SEP-IRAs, SIMPLE-IRAs, and Qualified Plans being subject to the 10% penalty for excess contributions.

[geekgirldany]

Wow! Thanks you Bees for this information. I sent in a research question to NATP about this and they sent me 13 pages of information and not once does it say it is a 10% penalty. But I see where you are talking about in TTB. I will look over the form 5330. I am going to list below what they sent me.

Thanks again Bees I really didn't know what to do when I saw there was nothing on form 5329 about a Simple.