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Question

IRA Simple Plan Employer Contribution Rules

Hi, 

I am looking for input on the retirement plan: IRA Simple Plan 

We are using 2021 R2:  After doing a tax update last week the employer contribution for our IRA Simple plan suddenly changed from the ER contributing on total Gross Pay to contributing on Taxable Wages - which is less contribution dollars since this implementation has a few pretax deductions. 

This sudden change in behavior has sparked a debate.  Looking for input from others who have this retirement plan. What should it be? On Gross or Taxable Wages?

The deduction is setup with Tax Settings of: 

 

Thanks in advance, 

Amy

I just ran a test of what you described on a 2021 R2 build 21.208.0032 with sample sales data.  I setup a SEP type Both deduction and contribution.  The employer contribution tab had Calculation Method: Percent of Gross.  I then ran the update taxes and did see any change.  In fact the only options are Percent of Gross, Amount Per Hour or Fixed Amount.  The Impact on Taxable Wage remained at the Tax Engine.  Did I miss something?

Hi Mike!

You didn’t miss anything. On my deduction setup: 

  • Employee Calculation Method is set to “Percent of Gross”. 3%. No max. 
  • Employer Calculation Method is set to “Percent of Gross”. 3%. No max. 

on 10/27/22, and all prior paychecks dated back to 10/1/2021, the paycheck calculation was correct. Both EE Deduction and ER contribution was 3% of Gross.(Both figures exact match.)

on 11/3/22, the paycheck calculation changed. EE Deduction at 3% of Gross. However, the ER contribution is 3% of gross pay less all pretax deductions. (Basically 3% of Taxable Wages.) 

The only change in between these 10/27/22 and 11/3/22 was a Tax Update. 

Mike, all taxation decisions are left to the tax engine. 

I see, In my limited testing I didn’t have pretax deductions so didn’t notice a change.  Thanks for the clarification.  

Did anyone ever come up with an answer?  We just executed documents to start a SIMPLE IRA, assuming Acumatica Payroll could handle the accounting.  Experimentation in our test environment produces the same results as expressed, above: the contribution calculation is after pre-tax insurance deduction rather than on true gross.  Edit of the sequence of calculation is not permitted and the sequence of both is set to zero.

Any hints or help would be most appreciated as I’ve got only a few days before I have to begin deductions/contributions.

Hi TSIJeff,

A couple of things come to mind that might help.

  1. In my experience, the tax engine is correct more than 95% of the time, so when in doubt, talk to your CPA. 
  2. Set yourself up for 2 employee tests. One employee with a SIMPLE IRA deduction amount, one employee with a % of gross as the deduction. Set up a pre-tax deduction. 
  3. You can’t manipulate the sequence; anything affecting taxation is sequence 0.
  4. If both tests turn out to not be what you desire, you can try settings up 2 separate deductions, where one handles the employee IRA deduction and one handles the employer IRA contribution. (Remember, you can also set deduction(s) to not use the tax engine.)

Good luck. Let me know how you make out. 

Thank you for the reply. 

Excellent to know I cannot manipulate the sequence on anything affecting taxation - I’ll stop trying.

The reason for my post was that I had done exactly what you propose in Point 2.  Acumatica calculates the Employee Deduction on the full Gross pay (in the % case), but the Employer Contribution is calculated on the Gross less Section 125 Insurance Premiums.  

If the tax engine is correct, it is not consistent with the SIMPLE IRA rules.  That is to say, the SIMPLE IRA rules dictate we match 3% of Gross Income on participants.  Removing Section 125 Plan (i.e., health insurance) payments from Gross prior calculation means we are contributing 3% of something less than Gross.  Tripping this point leads to the situation where we are required to match 2% on everyone, whether participating or not.  That is not acceptable.

@amyj03 your first point, however, “In my experience, the tax engine is correct more than 95% of the time, so when in doubt, talk to your CPA” gives me pause. 

I had not considered it might be correct.  Thank you.  I will research the IRS/Plan Document definition of Gross Income in this context.  I will report what I find (hopefully it will help someone in the same dilemma).

I flagged this link last year when I was doing research. (This definition of compensation was a grain of sand on a big IRS beach.) 
https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-you-used-the-wrong-compensation-definition-to-calculate-deferrals-and-contributions-to-participants-simple-iras

 

I found what I believe to be definitive (enough) proof the Tax Engine is calculating correctly.  In the IRS SIMPLE IRA FAQs I found this:

Under the SIMPLE IRA plan rules, what's the definition of compensation for an individual who is not self-employed?

For an individual who is not self-employed, compensation means:

  • wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a),
  • amounts described in Internal Revenue Code Section 6051(a)(8), including elective contributions made under a SIMPLE IRA plan, and 
  • compensation deferred under a 457 plan. 

Compensation doesn't include amounts deferred under a section 125 cafeteria plan (emphasis mine).

 

I will in the future be more trusting of the Tax Engine.  Thank you for your help @amyj03!

You’re quite welcome @TSIjeff. Happy Day!

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