006.05.307-26-51-414. DEFERRED COMPENSATION PLANS
AR ADC 006.05.307-26-51-414Arkansas Administrative Code
Ark. Admin. Code 006.05.307-26-51-414
006.05.307-26-51-414. DEFERRED COMPENSATION PLANS
A nonworking spouse can open up his or her own IRA and contribute up to $2,000.00 per year to the IRA. Under prior law, a nonworking spouse did not have the option of owning his or her own “spousal” IRA. To determine the deductibility of the contributions made to a married couple's IRAs, refer to IRC Sec. 219(c). The requirement of filing a joint return under IRC Sec. 219(c)(2)(A) in order to deduct contributions shall not apply.
Lump-sum distributions from qualified retirement plans will no longer be eligible for special 5 year income averaging beginning with the 2000 tax year. Except for older taxpayers eligible for the 1986 Tax Reform Act transition rules (i.e., 10 year averaging and capital gains treatment for the pre-1974 portion of the distribution), distributions from qualified plans will be taxed in the same manner as other income, regardless of the form of distribution. IRC Sec. 402(e)(4)(D).
A “church plan” is a retirement plan established and maintained by a tax exempt church or association of churches for its employees. These plans can cover ministers, regardless of the source of the ministers' compensation. A self-employed minister covered under a church plan is treated as his own employer. IRC Sec. 414(e)(5). Therefore, the minister can deduct his contributions to the church plan. IRC Sec. 404(a)(10). Prior to the 1997 tax year, self-employed ministers could participate in church plans, but their contributions were not deductible because the contributions were treated as made by the church itself, rather than the ministers.
Amounts that a participant defers under an “eligible deferred compensation plan” of a tax-exempt or state or local governmental employer (i.e., a “section 457 plan”) are includible in gross income after the participant separates from service only in the tax year in which the amounts are actually paid or otherwise “made available” to the participant.
Amounts deferred under a section 457 plan generally may not be “made available” to an employee before the earlier of: (a) the calendar year in which the participant attains age 70 ½, (b) when the participant is separated from service with the employer, or (c) when the participant is faced with an unforeseeable emergency.
Amounts payable are not treated as “made available,” and thus, will neither be includible in a participant's gross income under the constructive receipt rules, nor run afoul of the Code Sec. 457 distribution rules, in the following circumstances:
In-service section 457 plan distributions are not treated as “made available” if:
A taxpayer may make an early withdrawal of funds from an IRA or other qualified retirement plan free of the 10% penalty normally associated with such early withdrawals under the following two circumstances:
1 Payment of medical expenses in excess of 7 ½ % of the taxpayer's adjusted gross income (AGI). For example, a taxpayer's AGI is $40,000.00. 7 ½ % of $40,000.00 is $3,000.00. The taxpayer incurs medical expenses of $10,000.00 and makes an early withdrawal of $10,000.00 from his IRA to pay the expenses in full. The first $3,000.00 of the withdrawal would be subject to the 10% penalty. However, the remaining $7,000.00 would not be subject to the 10% penalty. IRC Sec. 72(t)(2)(B).
Beginning in tax years after 1996, eligible employers may maintain SIMPLE retirement plans to provide a tax-favored means of providing for employees' retirement. An eligible employer is an employer that:
An eligible employer who establishes and maintains a SIMPLE plan for at least one year, but thereafter fails to qualify, continues to be treated as an eligible employer for the two years following the last year in which it did qualify.
An employee is eligible to participate in any calendar year if he or she received at least $5,000 of compensation from the employer during each of the two preceding calendar years and is reasonably expected to receive at least $5,000 in compensation during the current calendar year. A self-employed individual is treated as an employee and may participate in a SIMPLE plan if the compensation threshold is met.
There are two types of SIMPLE plans.
A SIMPLE plan must permit each eligible employee to elect to have the employer make payments either (1) directly to the employee in cash or (2) as a contribution to the SIMPLE account. No contribution, other than elective contributions, employer matching contributions, and nonelective employer contributions may be made to a SIMPLE account. However, a rollover from another SIMPLE account may be received.
Elective contributions are limited to $6,000 for any calendar year. The employer must match the elective contribution of an employee in an amount not exceeding three percent (3%) of the employee's compensation. However, the employer may elect to limit its match, for all eligible employees, to a smaller percentage of compensation not less than one percent (1%). The election may not be made in more than two out of every five years.
Nonelective contributions may be made as an alternative to matching contributions. The employer may elect to make nonelective contributions of two percent (2%) of compensation for each employee who is eligible to participate and who has at least $5,000 of compensation from the employer for the calendar year. The compensation that may be taken into account in determining the two percent nonelective contribution may not exceed an indexed dollar amount. For 1996, this amount is $150,000 for most plans.
Elective contributions of employees are not includable in gross income when made. They are taxed only under the distribution rules that govern distributions from conventional IRAs. IRC Sec. § 408(p)(i)(A). Any elective contributions under this plan are included in the sum of elective deferrals, subject to an annual limit on the amount that can be excluded from income. IRC Sec. 402(g)(3)(D).
The employer is entitled to a deduction for its contributions to a SIMPLE account. For deduction purposes, the employer contributions to a SIMPLE account are treated as if they were made to a plan subject to the requirements of IRC Sec. 404(m).
For self employed persons, the contribution is not a business expense, therefore it is not deductible on the schedule C. In the case of a sole proprietorship the contribution may only be claimed as an adjustment to income.
Example: XYZ Company maintains a SIMPLE retirement plan for its eligible employees. Melinda Jones earns $30,000 from XYZ Company. The company matches the elective contribution in the amount of 3% of the employee's compensation. Ms. Jones elects to contribute $6,000.00 to her SIMPLE account. Ms. Jones has no other income deferrals. XYZ Company makes a matching contribution of $720.00 to Ms. Jones' SIMPLE account. [($30,000 - $6,000) x 3%]. Ms. Jones' wages reported on her W-2 are $24,000.00 and XYZ Company may deduct the $720.00 as an expense.
Current with amendments received through August 15, 2023. Some sections may be more current, see credit for details.
Ark. Admin. Code 006.05.307-26-51-414, AR ADC 006.05.307-26-51-414
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