Congressional intent was apparently for the Employer to contribute to the special IRA set up by the participating employee. Does this preclude the establishment of the Plan by an Employer or an Association under $408(c)?

2) The second question is, where will the employee accounts be established? ay all employee accounts be opened by the Employer at the same institution or will many accounts be opened at several banks, savings and loan associations, insurance companies, mutual funds, etc. This might be quite common in major metropolitan areas such as New York City where a large number of employees might wish to establish their accounts in institutions which are conveniently located near their residences. I m sure we don t have to tell you what this will mean with respect to paper work for the Employer.

3) What happens if each employee opens his individual SEPP at different times of the year? The SEPP may be established by the employee up to April 15th and a deduction taken by the employee for the preceding tax year. But if the Employer is a calendar year corporation, its tax return may have been filed prior to the establishment and funding of the employee s SEPP (tax returns for calendar year corporations are due by arch 15th). This may result in the Employer s return, upon which a deduction is allowed for the SEPP contribution, having to be amended.

4) Since contributions into the SEPP may be made after year-end for the previous year, additional problems come to mind. In such a case, in Year One (i.e. 1979), the year to which the SEPP contribution applies, the employee gets the deduction; but the contribution is considered income to him in Year Two (i.e. 1980), the year in which it is actually received. But what happens if the SEPP contribution for 1980, itself, is made in 1980. This is not only a headache for the Employer with respect to the filing of his tax return and the additional paper work involved, but it will become a problem for the employee as well.

For Example: Wing Soo s Wonderful Woks, a calendar year
taxpayer, established a SEPP for all twenty of its em-
ployees in 1979 and agreed to contribute 15% of each
employee s annual compensation of $12,000 into the Plan
(therefore, the contribution on behalf of each employee
is $1,800). Nineteen of the employees set up their in-
dividual SEPP s in December 1979, but the contributions
were made after year-end. The twentieth employee ( ei
Ling Smith) opened her SEPP on April 1, 1980.

A. The employer deducted on its 1979 tax return, as
additional wages, the sum of $34,200 (19 x the aver-
age contribution of $1,800 ) when it filed its tax
return on arch 15th, 1980 (the due date for calen-
dar year corporations). But, on April 1, 1980, it

must contribute an additional $1,800 to Mei Ling Smith's
account. It must now amend its 1979 corporate return to
show the contribution made to that one additional SEPP.

B. Each of the employees deducts the 1979 SEPP contribu-
tion on his own 1979 tax return, but the funds are con-
sidered income in the year received, 1980. In December
of 1980, the corporation makes the same contribution to
all 20 SEPPS for the 1980 year. The employees again
take their deduction for the contributions made to their
accounts for that year (1980). The amounts contributed
once again become additional income in the year received,
which in this case is 1980. BUT NOW, you have even more
additional income in the same, year, because of the dou-
bling up. Let's take a look at this: .

While the total deductions for the two years match the
increased income, the income and the deductions do not
coincide for the two years. This means that the employee
is showing more income on his taxes for the year 1980
than he actually received, and is being pushed into a
higher tax bracket as a result.

5) Since the Employer must withhold the employee share of FICA (Social Security Tax) when the wages are paid, where will the money come from for employees who open their SEPP after year-end? When the Employer makes a contribution for the employee, he is actually giving each employee additional wages and must, therefore, withhold additional FICA to cover the wage increase. In order to give $1,800

to each employee, the Employer must withhold $110.34 ($1,800 X 6.13% the FICA rate for 1980). If there is a single check given at the end of the year, the Employer will have to reduce either the SEPP contribution or the employee's take home pay. Your author would not want

to have to be the person who explains to the employee why his weekly paycheck was reduced.

Since the Employer must withhold the employee's share, he has the choice of:

a) withholding the additional FICA from the employee's
regular salary, assuming that the salary remain-
ing to be paid exceeds the FICA withholding tax;

b) withholding it from the SEPP contribution itself,
in which case the amount to be deducted by the
employee would be the net amount which has been
contributed into the SEPP (actual contribution
less the FICA); or

c) paying the amount directly, which would in effect
further increase the employee's compensation.

It would also increase the amount the Employer
agreed to contribute.

6) Those of you who were hoping to be able to begin establishing these plans early in 1979 by making a simple amendment to Article IX of your Form 5305 are in for a rude awakening. Article VII of Forms 5305 and 5305-A states that a person may make any amendment to an IRA by changing Article IX. It provides, however, that no such change shall amend Articles I, II, or III. Article I states that no contribution in excess of $1,500 shall be accepted into the account of a participant with respect to any taxable year. This means that a completely new document will be required. Our understanding is that the IRS will not be coming out with any forms until Spring.

7) It is extremely important to note that the employee's, and not the Employer's, contribution and deduction is limited to 15%, not to exceed $7,500. We will expand upon this consideration in a future article.

Let's Look At The Alternatives

Based upon its name, if the SEPP is truly a "simplified" plan, it must be simpler than something else. Because of its complexities,_ it is not simpler than either an IRA or a Keogh Plan, or even a Corporate Profit-Sharing Plan. What, then, is it simplier than?

(1) SEPP vs. The "Conventional" IRA:

Here, there is no simplification possible. With the elimination of the filing of Form 5329 (see News Service NO. 78-19/20), in most cases the SEPP reporting forms, when issued, will probably be more complex than the standard IRA. Since the IRA permits each individual employee to set up a plan if he chooses, there are no participation, contribution, withdrawal or reporting requirements for the Employer. It is important to remember that the conventional

IRA is primarily a tax shelter for the individual who is not covered by a plan. It is not a tool of employee benefit planning for the Employer.

The SEPP has broader limits than the conventional IRA because the contribution limits for the Employer to the Employee's SEPP are raised to the lesser of 15% of compensation, or $7,500. If the Employer doesn't take advantage of these new limits, the employee may establish his own IRA to fund the difference between the standard IRA limits (15% or $1,500) and the Employer's SEPP contribution. Since the Employer must adopt some sort of plan, keep records and file reports, we don't believe that the SEPP is simpler than the IRA for either the Employer or the employee. .

(2) SEPP vs. Keogh Plan: Since the limits of the Defined Contribution Keogh Plan are generally the same as the SEPP, and since there may be additional restrictions and record-keeping requirements for the Employer without the flexibility of a Keogh Plan, we do not believe, except in a few cases, that the SEPP will replace the Keogh Plan. It might be advantageous where the owner-employee establishes an "integrated" SEPP (see below) and there are few, if any, commonlaw employees earning more than the Social Security Wage Base. Also, whereas employees working less than 1000 hours may be excluded from Keogh Plans, they may not be excluded from a SEPP.

(3) SEPP vs. Corporate Defined Contribution Plan: Compared to a conventional qualified plan, the "plan" to fund the various SEPPS will have rules with respect to participation, vesting, etc., but it will also have more restrictions on contributions, forfeitures, loans, etc. The SEPP is designed to be less flexible than a qualified plan. When the simplified reporting requirements are issued, it may be possible that the SEPP might replace certain qualified plans for ease of reporting, but we believe that the other considerations might outweigh even that benefit.

NOW LET'S LOOK AT THE GOOD SIDE:

(1) A contribution may be made to a SEPP by an Employer, even if the employee is a participant in another qualified pension or profit-sharing plan.

(2) If the Employer contribution to the SEPP does not equal the conventional IRA limits (15% not to exceed $1,500), the employee may make his own "catchup" contributions to fund up to those limits, so long as he is eligible to otherwise establish an IRA. This means that an individual who is covered under a qualified plan may have Employer contributions made into a SEPP, but is not allowed to have any "catchup" contributions.

3) As we previously pointed out, the SEPP may be very advantageous in the case where the Employer contribution is being offset by the Employer's FICA contribution. Let's change the Pitty Pat Plastics Corp., in the example on Page 2, to include the President who earns $100,000 per year (the maximum level of compensation taken

into consideration when making contributions to a SEPP).
Example I: Employer elects contribution of 7.5%

(1) 20 employees at contribution rate of
7.5% (maximum) [20 x 12,000 X 7.5%] =

$18,000

71%

of the total contribution

In this case, none of the employees earn over the Social Security Wage Base, therefore, there is no contribution required to be made on their behalf. Although the contribution on behalf of the owner is reduced from $7,500 t $4,727, the contribution for the employees is reduced from $18,000 to $0. Since the SEPP may be established regardless of other plans, this may be an attractive alternative to or supplement to a Defined Contribution Plan already in existence.

These are just a few of our problems with the SEPP. Since we anticipate regulations from the IRS in the immediate future, we intend to defer the rest of our analysis until the future issues of the News Service. Hopefully, some of these problems will have been solved.

CONGRATULATIONS....

TO DOROTHY JENSEN, Central Bank of Denver, on her promotion to Assistant Vice President, IRA/KEOGH Dept.

TO BOWMAN N. TURFITT, Houston First Savings, on her promotion to Marketing Officer.

Anyone else who has recently received a promotion, please contact us so that we may announce it in our News Service.