SIMPLE, SEP, and SARSEP Answer Book

SIMPLE, SEP, and SARSEP Answer Book brings practitioners up to date on congressional and administrative agency actions affecting SEPs, SARSEP, and SIMPLE plans. Recent legislation and guidance, including changes made by the SECURE 2.0 Act of 2022 and IRS Notice 2024-2 are discussed throughout this book. Most of the provisions under the new SECURE 2.0 Act that affect a SEP, a SARSEP, a SIMPLE, or an IRA (and participants under such plans) are effective in 2023; however, some provisions take effect upon or immediately following enactment on December 29, 2022, while others take effect in 2024, and up until 2026. New discussions and analysis of coverage include:

• Updated summaries of SECURE 2.0 Act provisions, effective dates, and more (see Qs 1:53, 14:25, and 15:93 ; see also Exhibit 1-1).
• The SIMPLE IRA contribution rules and the treatment of small employers (generally 25 or fewer employees) and electing and nonelecting large employers (generally 26 to 100 employees) under SECURE 2.0 (see Qs 14:8, 14:100, 14:103, 14:104 – 14:112 ; and see also new chapter examples and chart in Q 14:112).
• The SIMPLE 401(k) contribution rules and the treatment of large employers (generally 25 or fewer) and electing and nonelecting large employers (generally 26 to 100 employees) (see Qs 15:2 – 15:3, 15:24, 15:39 – 15:42, 15:44 ; and see also new chapter examples and charts in Q 15:40).
• New discussion on the correcting of operational failure in the SEP or SIMPLE IRA plan, even if the failure is discovered upon examination (see Q 3:8).
• New discussion on how excess SIMPLE IRA and Roth SIMPLE IRA contributions are reported on Form 5329 (see Qs 14:217 – 14:218 and 14:219).
• Expanded coverage of the correct starting point for calculating earned income for a partner or self-employed individual (see Q 7:23).
• Expanded discussion of the maximum annual amount of salary reduction contributions under a SIMPLE IRA plan (see Q 14:104).
• Expanded discussion of the non-bank trustee's notification or notice of change (see Q 14:49).
• Revised discussion of how the higher catch-up limits apply at ages 60 through 63 that became effective in 2025 (see Q 5:25).
• Updated coverage of the adjustments to arrive at earned income (see Q 7:26).
• How the limits on deductible contributions are adjusted for catch-up contributions under a SARSEP (see Q 10:3).
• Discussion of who should correct excess elective salary deferral contributions that are also nondeductible under Code Section 404 (see Q 10:10).
• New coverage of how excess SIMPLE IRA and Roth SIMPLE IRA contributions are reported on Form 5329 (see Q 14:217).
• Expanded coverage of the ordering rules for nondeductible contributions and how the 10 percent nondeductible contribution penalty can be returned to plan sponsor (see Qs 10:3 – 10:4, 10:12, 10:15, and 14:119).
• How adjustments are made in an integrated SEP to the $70,000 limit for the two types of catch-up contributions (see Q 9:13, Table 9-3).
• Revised discussion of what a spouse must do to consent to a participant's qualified election (see Q 16:57).
• Revised coverage of IRS Notice 2023-43 (2023-24 I.R.B. 919), allowing for self-correction of certain insignificant operational failures and most significant failures in a SEP, SIMPLE IRA, or SIMPLE 401(k), even if the failures are discovered on examination (see chapter 17).
• Analysis of the Employee Benefits Security Administration's amended and restated Voluntary Fiduciary Correction Program and associated updated prohibited transaction exemption (PTE) addressing the correction of eligible inadvertent failures (e.g., most delays in remitting elective deferrals to employee accounts) allowed under the Internal Revenue Service's (IRS's) Employee Plans Compliance Resolution System (EPCRS) program (see Qs 17:46 – 17:74).
• Expanded discussion of the percentage limits that apply to a SEP plan (see Q 10:4).
• New coverage of whether an elder abuser is deprived of one's victim's benefit (see Q 16:101).
• Revised discussion of how compensation is defined in model and prototype SEPs (see Q 3:16).
• Revised discussion on the correction of Code Section 415 violations (see Q 5:19).
• Updated coverage of the eight limits that might apply to a SEP plan (see Qs 1:3 – 1:4).
• Additional employer nonelective contribution to SIMPLE IRA, and SIMPLE 401(k) (see Qs 14:114 – 14:116, and 15:24).
• Revised discussion of the extension to amend SEP, SARSEP, SIMPLE, and IRA documents under IRS Notice 2022-33 (see Qs 3:4, 3:7, and 3:20).
• Expanded discussion of the higher catch-up limit for individuals who first attain ages 60 through 63 (see Qs 5:25, 12:7 – 12:8, 14:117, and 15:44).
• Revised discussion on how SECURE 2.0 impacted SEP, SARSEP, and SIMPLE IRA plans (see Q 1:53).
• New coverage of how excess deferrals of a highly compensated employee (HCE) are taken into account when calculating the actual deferral percentage (ADP) rate (see Q 12:11).
• Updated chart on SECURE 2.0 provisions and effective dates with links to discussions (see Q 1:54).
• Revised discussion of the correction window for the reduction of excise tax from 25 percent to 10 percent for failure to remove RMDs that ends before tax return due date (see Qs 5:62 and 13:43).
• Updated coverage of whether an employer can establish a Roth SEP IRA for a participant unwilling or unable to establish an IRA (see Q 1:11).
• Why the 25 percent participant exclusion limit is applied after subtracting allowable elective salary reduction contributions (other than catch-up contributions) from compensation (see Q 11:2, examples, and Q 11:3).
• Updated discussion of how the IRS Forms 1040, 1099-R, 5329, 5498, and W-2 are completed, and the reporting codes applicable to IRA distributions (see Qs 13:40, 13:92, 13:102, 13:158, 13:164, and 13:204).
• Updated coverage and examples of the HCE ownership and compensation tests (see Q 1:14).
• Revised coverage of who is a statutory employee, how a statutory employee's income is treated for plan purposes, and how the income is reported on Schedule SE (Form 1040) (see Q 7:3).
• Updated discussion of the replacement of the Saver's credit with a Matching Savers' match (see Qs 1:36 – 1:39, 14:222).
• Revised discussion on fixing RMD shortfalls to reduce the 25 percent penalty (see Q 5:62).
• Updated tables of SEP establishment dates for different types of entities (see Qs 2:32, 2:33, 2:35, and 2:37).
• Updated discussion of combining a SEP plan with a 403(b) plan (see Q 2:11).
• May elective contributions continue after having earned $350,000 for 2025 (see Q 6:38)?
• Updated discussion of the differences between a trustee and custodian (see Q 1:9).
• Updated coverage of the qualifying longevity annuity contract (QLAC) rules (see Q 1:34).

Other changes include—

• Updated coverage of the legal holidays for 2025 and the date when tax returns for 2025 have to be filed in 2026 (see Q 13:62).
• Analysis of the amount of self-employed compensation needed ($365,816.76 and $436,766.84 for 2025) to receive the maximum ($70,000 for 2025) in a SEP with 25 and 20 percent nonelective employer contribution rates (see Q 6:39).
• Updated analysis of the integration and participant exclusion rules that permit larger contributions to be made for employees earning above a specified amount but that also require that the $70,000 (for 2025) allocation limit be reduced (see chapter 9).

Recent changes include—

• Updated discussion of how a prohibited transaction that occurred in an earlier year was used to avoid taxation of a current year distribution (see Q 5:60).
• When the Statute of Limitation on Form 5329 begins and whether it can be given retroactive effect (see Q 13:42).
• Expanded discussion of the mid-year termination and replacement of a SIMPLE IRA with a safe-harbor 401(k) replacement plan (see Qs 14:147 – 14:159 and 15:89).
• Discussion on designating Roth SEP IRA contributions, including:
  • When the Roth SEP IRA designation rules apply (see Qs 5:8 and 5:10).
  • Employer requirements to offer a Roth contribution election (see Q 5:9).
  • Employee election timing requirements (see Qs 5:11 – 5:12).
  • Prior Roth elections under an automatic contribution agreement (see Q 5:13).
  • How and when contributions are reported on Form 1099-R (see Qs 5:14 and 5:54).
  • Exclusion of Roth IRA contributions from income (see Qs 5:22 – 5:23, 11:15 – 11:22).
  • FICA, FUTA, and Withholding obligations (see Table 11-1, Qs 11:17, 14:172 – 14:173, and 15:34).
  • Form W-2 reporting of Roth SEP IRA elective contributions (see Q 11:12).

Expanded coverage of SIMPLE 401(k) plan changes under SECURE 2.0 include—

• Designating matching and nonelective contributions as designated Roth contributions under a SIMPLE 401(k) plan (see Qs 15:26 – 15:35).
• Replacement of SIMPLE IRA arrangement mid-year with a safe-harbor plan (see Qs 14:147 and 15:89).
• Making of additional employer nonelective contribution to SIMPLE 401(k) plans (see Q 15:45).
• Increased SIMPLE 401(k) deferral and catch-up contribution limits (see Q 15:40 – 15:46).
• Higher participant catch-up limits to apply next year at ages 60, 61, 62, and 63 (see Q 15:44).
• Whether conversion contributions to a Roth IRA are subject to the 12-month rule (see Q 5:63).

Expanded coverage of SIMPLE IRA changes under SECURE 2.0 includes—

• Whether designated Roth contributions are included in the safe-harbor definition of compensation (see Q 15:36).

Additional changes under SECURE 2.0 include—

• Allow an employer to replace a SIMPLE IRA plan mid-year with a safe-harbor 401(k) plan (see Qs 14:149 – 14:159).
• Allow additional employer nonelective contributions (up to 10 percent of compensation, but not more than $5,100) under a SIMPLE IRA plan (see Q 14:116).
• Increased SIMPLE deferral and catch-up contribution limits (see Q 14:76).
• Higher catch-up limits to apply beginning in 2025 at ages 60, 61, 62, and 63 (see Q 14:111).
• Treat student loan payments as deferrals for match (see Q 14:78).

Updated appendices for 2025 include—

• Summary of Employee Benefit Limits for Smaller Business Owners and More (see Appendix A).
• Notification of excess SEP contributions, disallowed deferrals, excess deferrals, as well as a request to return employer and employee contributions under the EPCRS (see Appendix B).
• Sample allocation notice for model SEP and integrated and non-integrated prototype SEP plans (see Appendix C).
• Comparison of 401(k) plans and grandfathered SEP/SARSEP plans for 2025 (see Appendix D).
• Employee benefit limits for 2025 (see Appendix F).
• Illustrations of selected examples (see Appendix G).
• Illustration request form for SEP, SARSEP, and SIMPLE plans (see Appendix J).
• Excess elective SEP/SARSEP contribution flow chart (see Appendix L).
• Comparison chart for SIMPLE IRA and SIMPLE 401(k) plans (see Appendix M).
• Comparison of elective deferral plans (see Appendix N).
• Traditional and Roth IRA eligibility flow charts (see Appendix Q).