SIMPLE IRA for side biz when job's 401(k) is maxed out

[joanmcq]

New client has a pretty profitable Sch C biz (50k profit) along with a W-2 job. Set up a SIMPLE for the Sch C, and maxed out his 401(k) at his employer. The SIMPLE plan has him making a nonelective employer contribution of 2%.

ATX is not allowing a deduction for the employer match on line 28, although from what I've read, although the 'ee contribution is denied since he maxed his 401(k), the nonelective contribution should still be allowed. I actually cannot find a place to designate a nonelective contriution on the line 28 worksheet. Am I over looking something?

[mcb39]

I don't think that a Simple plan is allowed in this case, but a SEP, based on SE income is allowed to exceed the maximum.

[joanmcq]

No employee or employer matching is allowed, but his plan is set up with a nonelective employer contribution. This is 2% of earnings regardless of any employee contribution, and must be made or the plan is out of compliance. The employee doesn't even elect to be in the plan.

[Pacun]

Maybe because your client is an active participant on an employer sponsored plan.

[joanmcq]

Yeah, I know this. But someone on another listserve said this was not a problem for the nonelective employer contribution, and it should be deductible. The employer has the choice of either making an up to 3%match of employee contributions or a mandatory 2% of compensation contribution, not based on any employee action. I can't find anything in the pubs, any of my research, for this particular situation. And the frikkin ATX worksheet does not address the nonelective contribution whatsoever, only the employer match, which is an entirely different animal. I never consider SIMPLE plans for sole props without employees because you can ALWAYS get a better deal with solo (k)s or SEPs, depending on what the other circumstances are.

[mcb39]

I always have my SE clients contribute to a SEP because if they are employed full-time somewhere and max out their 401 K; a SEP contr is not affected.

[joanmcq]

Yeah, but I didn't set this up; it's a new client with the SIMPLE already in place. I've already advised him that terminating the SIMPLE and starting a SEP would be a better fit since he would like to maximize his retirement contributions.

[Randall]

The SEP max contribution is based on a percentage. The SIMPLE max contribution is based on a dollar amount. So unless the sole prop makes a very high income, the SIMPLE is preferable because he can put in more dollars. I don't know off hand regarding your problem of the sole prop having a regular job and participating in his employer sponsored plan. But for those who only have their business activity, the SIMPLE is usually the preferable plan. Also, if he has employees, his match to them is lower in the SIMPLE than the SEP. For businesses with high turnover though, the SEP may be preferable because of the vesting rules on the employer match. They leave not vested, those dollars are redistributed the everyone else in the plan, the employer getting the biggest chunk of that. So he can grow his own account more over the years.

This doesn't answer your problem, just wanted to address the SEP vs SIMPLE topic.