Category: Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com 1. SIMPLE plans are generally required to cover any employee who received at least $5,000 of compensation from the employer during the two preceding calendar years and who could reasonably be expected to receive at least $5,000 of compensation from the employer in the current calendar year. IRC Section 408(p)(4)(a) and Notice 97-6, 1997-2 IRB 26. An employer may liberalize the compensation requirementeither for the current year, the prior years, or bothby either lowering or eliminating the compensation limitations. Notice 97-6, Q&A C-2. There is no indication that the ability to liberalize the compensation eligibility requirement is any different with respect to self- employed individuals. Obviously, any liberalization must be applied across-the board both to the self-employed individual as well as any rank-in-file employees. 2. Contributions and eligibility under SIMPLE plans are based on compensation. For a self-employed person, compensation is defined as net earnings from self- employment as defined at Section 1402(a), but before consideration of any contributions to the SIMPLE plan. Since net income from self-employment purposes is reduced by one-half the amount of self-employment tax (IRC Section 1402(a)(12), then the amount compensation for purposes of a SIMPLE is also so reduced. 3. There seems to be considerable confusion about the ability of a self-employed person to take advantage of the employer matching provisions under the SIMPLE rules. You provided two sources of information each with apparently conflicting advice. The bottom line is a self-employed individual can make matching contributions that do not count toward the $6,000 elective contribution limit. The reason for the confusion is a law change from the 1997 round of tax amendments. Even more confusing is the fact that there is difference in effective date of this rule depending on how the SIMPLE plan is established. SIMPLE plans were enacted in the late 1996 round of tax legislation, specifically as part of Small Business Job Protection Act of 1996. As initially enacted, matching contributions for a self-employed person were treated as elective contributions and thus subject to the overall $6,000 limitation. In other words, a self-employed person could make matching contributions, but the matching contribution plus the elective portion could not exceed the $6,000 maximum. A SIMPLE plan can be set up as an IRA-type plan or as part of a 401(k) plan. This is simply a decision made when the plan is established. The Taxpayer Relief Act of 1997 changed the treatment matching of contributions for self- employed individuals. For IRA-type plans, Section 408(p)(8) was added which provides that matching contributions for self-employed persons are not considered elective contributions. This provision is effective retroactively. Thus the new provision would be effective both for 1997 as well as subsequent years. Act Section 1501(c)(2). For 401(k) plans, the ruleat IRC Section 402(g)(9)is effective for tax years after 1997. Act Section 1501(c)(1). Accordingly, 401(k)-type plans have the old rules for 1997 and the new rules for 1998 and subsequent. Although the information sources you sent seem contradictory, the two passages actually make the proper distinction between IRA-type plans and 401(k)-type plans. This reconciles the two apparently conflicting pieces of information. |
