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Making SEP contributions for terminated employees


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#1 bmurphy

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Posted 14 October 2004 - 01:05 PM

Employer is making a SEP contribution for 2 employees who termed. They were sent applications to complete but never returned them. Can employer complete an application on behalf of the termed employees & select a money market option? That would seem to be the most prudent course of action.

#2 Appleby

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Posted 14 October 2004 - 01:38 PM

Yes. If the employee refuses to complete the paperwork, or the employer is unable to locate the employee, the employer should complete the paperwork on behalf of the employee to establish the employee’s SEP IRA. My notes say cite Prop Treas Reg Sec 1.408-7, but I can't seem to get my hands on a copy

#3 mbozek

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Posted 14 October 2004 - 02:28 PM

However the custodian may refuse to accept the employer's signing on behalf of the employee because of company rules or regulatory requirements.
mjb

#4 Appleby

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Posted 14 October 2004 - 02:59 PM

Good point mbozek. The new CIP regulations could nullify that option

#5 Bird

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Posted 15 October 2004 - 07:40 AM

Talk to the custodian. In most cases they will allow the employer to set up the account on behalf of the employee, but they might want a special form to do it.

#6 jevd

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Posted 15 October 2004 - 09:42 AM

From IRS PROPOSED Regs 1.408-7

See (d) (2)

d) Participation requirements

(1) Age and service requirements. --This paragraph is satisfied with respect to a simplified employee pension arrangement for a calendar year only if for such year the employer contributes to the simplified employee pension on behalf of each individual who is an employee at any time during the calendar year who has --

(i) Attained age 25,

(ii) Performed service for the employer during at least 3 of the immediately preceding 5 calendar years, and

(iii) Received at least $200 compensation from the employer for the calendar year.

(2) Execution of documents. --The employer may execute any necessary documents on behalf of an employee who is entitled to a contribution to a simplified employee pension if the employee is unable or unwilling to execute such documents or the employer is unable to locate the employee.

(3) Required employment. --An employer may not require that an employee be employed as of a particular date in order to receive a contribution for a calendar year.

(4) Nonresident aliens and employees covered by collective-bargaining agreements. --An employer may exclude from participation in the simplified employee pension arrangement employees described in section 410(b)(2)(A) or 410(b)(2)©.

(5) Example. --The provisions of this paragraph may be illustrated by the following example:

Example. Corporation X maintains a simplified employee pension arrangement for its employees. Individual J worked for Corporation X while in graduate school in 1976, 1977, and 1978. J never worked more than 25 days in any particular year. In October of 1979, J began to work for Corporation X on a full-time basis. J earned $5,000 from Corporation X for 1979. J became 25 on December 31, 1979. Corporation X must make a contribution to a simplified employee pension maintained on behalf of J for 1979 because as of December 31, 1979, J had met the minimum age requirement of section 408(k)(2), had performed service for Corporation X in 3 of the 5 calendar years preceding 1979, and met the minimum compensation requirements of paragraph (d)(1)(iii).


Edited by Gary Lesser, 18 October 2004 - 01:36 PM.

JEVD
Making the complex understandable.

#7 bkp

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Posted 20 October 2004 - 01:56 PM

Can an employer meet its obligation to make SARSEP contributions to terminated employees (who have not established SARSEP accounts) by delivering checks made payable to "SARSEP custodian for benefit of (employee's name)" and direct the former employees to establish an appropriate account?

#8 Gary Lesser

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Posted 20 October 2004 - 07:38 PM

Yes, but if an employee fails to establish the account timely, then the entire plan could fail. Best to establish accounts on behalf of the "missing or uncooperative" employees.

#9 bkp

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Posted 09 December 2004 - 06:24 PM

I'm following up on my question about an employer opening custodial accounts and making nonelective contributions to employees who have terminated but who are eligiblefor employer's nonelective contribution under a SARSEP (IRS Model).

In trying to establish custodial accounts on behalf of some of these employees, I find that the amounts of the contributions (two cases of being less than $100) are less than the custodians' minimums and the custodians can't make exceptions. Any suggestions about what to do in order to comply with the rules?

#10 Gary Lesser

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Posted 10 December 2004 - 01:37 AM

If the employer has any leverage with the custodial organization it should excercise it. If employer has its accounts with same institution, a cross-eyed glane will usually work. :angry: The account can be established with a different trustee or custodian. Many mutual fund complexes waive the minimum initial investment for "related" accounts or when contributions are required to be made. The accounts must be established and the contributions made to the plan for the plan to pass muster for the plan year involved.

#11 Belgarath

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Posted 10 December 2004 - 07:59 AM

I saw a very unusual situation on one of these many years ago. Employee didn't want the SEP contribution, because it was small and would have resulted in a lost IRA deduction. So the employee wrote a letter to the employer, saying that he objected to a SEP contribution on religious grounds, and would sue the employer for religious discrimination if the SEP contribution were established for him! So the employer didn't contribute.

Personally, I felt like the whole thing was a sham cooked up between the employee and the employer, because I'd think that most employers would fire an employee who did this. But maybe it wasn't faked. I always wondered what the IRS would do if they happened to check this out.

#12 Gary Lesser

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Posted 12 December 2004 - 10:34 AM

The IRS would, unhesitatingly, invalidate the SEP. ALL eligible employees must receive nonelective contributions if any are made. Opting out is not permitted (regardless of the reason).

So, if the IRA could have been established on a deductible basis, I imagine that the employee would have accepted the contribution as a "gift from G^d!

#13 mbozek

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Posted 12 December 2004 - 06:06 PM

Why not think outside of the box? Since these are nhces make the minimum contribution required by custodian, e.g. $100, in order to meet the regulatory requirements. If the problem is that the ee need to be active ee then make them ee for a day pay them their salary and make the min. contribution on that day. If the problem is getting the ee to sign an IRA application offer them a payment of $100 if they will send back a signed IRA application. There is no reason to have the SEP contribution invalidated because of termination during the year. The s/l for disqualfiying the contributions is only 3 years.
mjb

#14 Gary Lesser

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Posted 14 December 2004 - 08:52 PM

Just expanding on above...... If the contribution were made, the employee would have to deal with the excess (also reported in box 1 of Form W-2). Small price to pay for tax-santioned SEP status.

#15 gbandy

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Posted 20 January 2005 - 05:47 PM

A somewhat related question. I'm planning to terminate employment and am under the impression, based on some of the information in this discussion, that my employer, if making once-a-year profit based contributions for 2004 in the next couple of months to our SARSEP plan, would be required to contribute to my account whether or not I'm still employed with the company. I really don't want to stick around until possibly as late as April just to make sure I receive this, but I will consider staying those extra couple of months if necessary to receive this granted only potential but fairly predictable contribution.

Edited by gbandy, 21 January 2005 - 10:54 AM.


#16 Gary Lesser

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Posted 24 January 2005 - 10:28 PM

If you would have otherwise have received a contribution (such as a nonelective employer ("P/S") contributions to a SEP, or a top-heavy contribution to a SEP or SARSEP) from your employer for the plan year (generally the CY), your leaving before the date the contribution is made would not affect the fact that if a contribution is made you'd get your share.

Be sure the employer/trustee has your current address for notices (and so on).

Hope this helps.

#17 gbandy

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Posted 25 January 2005 - 04:53 PM

I've had trouble understanding the terminology to quantify what kind of contributions my employer makes every year, but I guess I can take from this that, if there is a contribution, I'll receive my portion whether I'm still here or not. Thanks for your help!