1. (a) Deferred compensation plans — IRAs — Arkansas Code § 26-51-414.

   1. (1)

      1. (A) A nonworking spouse can open up his or her own IRA and contribute up to two thousand dollars ($2,000) per year to the IRA.
      2. (B) Under prior law, a nonworking spouse did not have the option of owning his or her own "spousal" IRA.

   2. (2)

      1. (A) To determine the deductibility of the contributions made to a married couple's IRAs, refer to I.R.C. § 219(c).
      2. (B) The requirement of filing a joint return under I.R.C. § 219(c)(2)(A) in order to deduct contributions shall not apply.

2. (b) Deferred compensation plans — Lump-sum distributions — Arkansas Code § 26-51-414.

   1. (1) Lump-sum distributions from qualified retirement plans will no longer be eligible for special five-year income averaging beginning with the 2000 tax year.
   2. (2) Except for older taxpayers eligible for the Tax Reform Act of 1986, Pub. L. No. 99-514, transition rules (i.e., ten-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.
   3. (3) I.R.C. § 402(e)(4)(D).

3. (c) Deferred compensation plans — Self-employed ministers — Arkansas Code § 26-51-414.

   1. (1) A "church plan" is a retirement plan established and maintained by a tax-exempt church or association of churches for its employees.
   2. (2) These plans can cover ministers, regardless of the source of the ministers' compensation.

   3. (3)

      1. (A) A self-employed minister covered under a church plan is treated as his or her own employer.
      2. (B) I.R.C. § 414(e)(5).

   4. (4)

      1. (A) Therefore, the minister can deduct his or her contributions to the church plan.
      2. (B) I.R.C. § 404(a)(10).
   5. (5) 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.

4. (d) Deferred compensation plans — Section 457 plan distributions — Arkansas Code § 26-51-414.

   1. (1) Amounts that a participant defers under an eligible deferred compensation plan of a tax-exempt or state or local governmental employer (i.e., an I.R.C. § 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.

   2. (2) Amounts deferred under an I.R.C. § 457 plan generally may not be made available to an employee before the earlier of:

      1. (A) The calendar year in which the participant attains age seventy and one-half (70 1/2);
      2. (B) When the participant is separated from service with the employer; or
      3. (C) When the participant is faced with an unforeseeable emergency.

   3. (3)

      1. (A) 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 I.R.C. § 457 distribution rules, in the following circumstances.
      2. (B) In-service I.R.C. § 457 plan distributions are not treated as "made available" if:

5. (i) The total amount payable does not exceed three thousand five hundred dollars ($3,500); and

   1. (ii) There has been no prior distribution from the I.R.C. § 457 plan to the participant.

      1. (C) I.R.C. § 457(e)(9)(A).

6. (e) Penalty-free withdrawals from IRAs and qualified retirement plans — Arkansas Code § 26-51-414. A taxpayer may make an early withdrawal of funds from an IRA or other qualified retirement plan free of the ten percent (10%) penalty normally associated with such early withdrawals under the following two (2) circumstances:

   1. (1)

      1. (A) Payment of medical expenses in excess of seven and one-half percent (7.5%) of the taxpayer's adjusted gross income (AGI). Example: A taxpayer's AGI is forty thousand dollars ($40,000). Seven and one-half percent (7.5%) of forty thousand dollars ($40,000) is three thousand dollars ($3,000). The taxpayer incurs medical expenses of ten thousand dollars ($10,000) and makes an early withdrawal of ten thousand dollars ($10,000) from his IRA to pay the expenses in full. The first three thousand dollars ($3,000) of the withdrawal would be subject to the ten percent (10%) penalty. However, the remaining seven thousand dollars ($7,000) would not be subject to the ten percent (10%) penalty.
      2. (B) I.R.C. § 72(t)(2)(B); or

   2. (2)

      1. (A) The taxpayer is unemployed at the time the withdrawal is made and meets the following criteria:

         1. (i) The taxpayer has received unemployment compensation for at least twelve (12) consecutive weeks;
         2. (ii) The withdrawal does not exceed the total amount paid during the tax year by the taxpayer for premiums for health insurance coverage for the:
7. (a) (a) Taxpayer;

8. (b) (b) Taxpayer’s spouse; and

   1. (c) (c) Taxpayer’s children; and

      1. (iii)
9. (a) (a) The withdrawal must be made in the year the unemployment compensation is actually received or the following year.

10. (b) (b) I.R.C. § 72(t)(2)(D).

    1. (B) The actual retirement funds withdrawn do not have to be paid towards the health insurance premiums to qualify for the break from the ten percent (10%) penalty.

11. (f) Savings Incentive Match Plan for Employees (SIMPLE) — Arkansas Code § 26-51-414.

    1. (1)

       1. (A) Beginning in tax years after 1996, eligible employers may maintain SIMPLE retirement plans to provide a tax-favored means of providing for employees' retirement.

       2. (B) An eligible employer is an employer that:

          1. (i) Employs no more than one hundred (100) employees who each received at least five thousand dollars ($5,000) of compensation from the employer the preceding year; and
          2. (ii) Does not maintain another employer-sponsored retirement plan to which contributions were made or benefits accrued.
    2. (2) An eligible employer who establishes and maintains a SIMPLE plan for at least one (1) year, but thereafter fails to qualify, continues to be treated as an eligible employer for the two (2) years following the last year in which it did qualify.

    3. (3)

       1. (A) An employee is eligible to participate in any calendar year if he or she:

          1. (i) Received at least five thousand dollars ($5,000) of compensation from the employer during each of the two (2) preceding calendar years; and
          2. (ii) Is reasonably expected to receive at least five thousand dollars ($5,000) in compensation during the current calendar year.
       2. (B) A self-employed individual is treated as an employee and may participate in a SIMPLE plan if the compensation threshold is met.

    4. (4) There are two (2) types of SIMPLE plans:

       1. (A) Cash or deferred arrangement (CODA) incorporated in a qualified plan (I.R.C. § 401(k)(11)(C)); or
       2. (B) An IRA established for each participating employee.

    5. (5)

       1. (A) A SIMPLE plan must permit each eligible employee to elect to have the employer make payments either:

          1. (i) Directly to the employee in cash; or
          2. (ii) As a contribution to the SIMPLE account.

       2. (B)

          1. (i) No contribution, other than elective contributions, employer matching contributions, and nonelective employer contributions may be made to a SIMPLE account.
          2. (ii) However, a rollover from another SIMPLE account may be received.

    6. (6)

       1. (A) Elective contributions are limited to six thousand dollars ($6,000) for any calendar year.
       2. (B) The employer must match the elective contribution of an employee in an amount not exceeding three percent (3%) of the employee's compensation.

       3. (C)

          1. (i) 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%).
          2. (ii) The election may not be made in more than two (2) out of every five (5) years.

    7. (7)

       1. (A) Nonelective contributions may be made as an alternative to matching contributions.

       2. (B) The employer may elect to make nonelective contributions of two percent (2%) of compensation for each employee who:

          1. (i) Is eligible to participate; and
          2. (ii) Has at least five thousand dollars ($5,000) of compensation from the employer for the calendar year.

       3. (B)

          1. (i) The compensation that may be taken into account in determining the two percent (2%) nonelective contribution may not exceed an indexed dollar amount.
          2. (ii) For 1996, this amount is one hundred fifty thousand dollars ($150,000) for most plans.

    8. (8)

       1. (A) Elective contributions of employees are not includable in gross income when made.

       2. (B)

          1. (i) They are taxed only under the distribution rules that govern distributions from conventional IRAs.
          2. (ii) I.R.C. § 408(p)(1)(A).

       3. (C)

          1. (i) 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.
          2. (ii) I.R.C. § 402(g)(3)(D).

    9. (9)

       1. (A) The employer is entitled to a deduction for its contributions to a SIMPLE account.
       2. (B) 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 I.R.C. § 404(m).

    10. (10)

        1. (A) For self-employed persons, the contribution is not a business expense, therefore it is not deductible on the Schedule C.
        2. (B) 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 thirty thousand dollars ($30,000) from XYZ Company. The company matches the elective contribution in the amount of three percent (3%) of the employee's compensation. Ms. Jones elects to contribute six thousand dollars ($6,000) to her SIMPLE account. Ms. Jones has no other income deferrals. XYZ Company makes a matching contribution of seven hundred twenty dollars ($720) to Ms. Jones' SIMPLE account (($30,000 - $6,000) x 3%). Ms. Jones' wages reported on her W-2 are twenty-four thousand dollars ($24,000), and XYZ Company may deduct the seven hundred twenty dollars ($720) as an expense.

Codification Notes: I.R.C. § 219(c) is codified at 26 U.S.C. § 219(c). I.R.C. § 219(c)(2)(A) is codified at 26 U.S.C. § 219(c)(2)(A). I.R.C. § 402(e)(4)(D) is codified at 26 U.S.C. § 402(e)(4)(D). I.R.C. § 414(e)(5) is codified at 26 U.S.C. § 414(e)(5). I.R.C. § 404(a)(10) is codified at 26 U.S.C. § 404(a)(10). I.R.C. § 457(e)(9)(A) is codified at 26 U.S.C. § 457(e)(9)(A). I.R.C. § 72(t)(2)(B) is codified at 26 U.S.C. § 72(t)(2)(B). I.R.C. § 72(t)(2)(D) is codified at 26 U.S.C. § 72(t)(2)(D). I.R.C. § 401(k)(11)(C) is codified at 26 U.S.C. § 401(k)(11)(C). I.R.C. § 408(p)(1)(A) is codified at 26 U.S.C. § 408(p)(1)(A). I.R.C. § 402(g)(3)(D) is codified at 26 U.S.C. § 402(g)(3)(D). I.R.C. § 404(m) is codified at 26 U.S.C. § 404(m).