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SEP and new 401k plan same year?


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5 replies to this topic

#1 Boots

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Posted 10 August 2011 - 05:04 PM

I did a search on the board and found a few topics that come close to what I'm trying to figure out, but not quite there. I'm not at all familiar with SEPs I've read the different FAQs and pub 560 etc. Any help or guidance is greatly appreciated!

Here's the situation:

The client has a SEP plan (IRS model 5305). Client has filed an extension on his tax return, so the final 2010 contribution will be funded in Oct.

This client also adopted a new 401k plan effective 7/1/2010, no contributions were deposited to the 401k plan for 2010.

The IRS FAQ's regarding SEP's stated that a SEP can't be established if they have a QP already. Can this client set up a 401k plan after they have set up the SEP plan? Is the contribution to the SEP valid or should the contributions be deposited to the 401k plan for 2010?

Next question: In 2011, the client rolls his SEP plan into the 401k plan - if the 401k document allows, would this be permitted. Would you need to terminate the SEP plan.

No other employees have met the eligibility for either plan.

#2 ETA Consulting LLC

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Posted 10 August 2011 - 06:05 PM

First,

You should write the SEP to a prototype and take it off the IRS Model, since the IRS model cannot be used when there is also a qualified plan.
The contributions may be made to the SEP per eligibiity conditions of the SEP. The point of contention may be if there are employees in the 401(k) plan who are "eligible" and do not receive a SEP contribution, they may be entitled to a benefit under Top Heavy provisions. For top heavy, I typically do not "as of" contributions back into the balances for non-pension plans, but in this case (being the first year), it may be a conservative approach.

There is nothing by statue that would preclude a SEP from being rolled into a 401(k) plan. Also, there is no formal SEP termination process like that of a qualified plan.

In the end, based on the employee base, your actions could vary. It appears as if the client would've been better off not establishing the 401(k) plan.

Just providing a few thoughts, but cannot provide a clear action plan without more information.

Good Luck!
CPC, QPA, QKA, TGPC, ERPA

#3 Boots

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Posted 11 August 2011 - 08:55 AM

First,

You should write the SEP to a prototype and take it off the IRS Model, since the IRS model cannot be used when there is also a qualified plan.
The contributions may be made to the SEP per eligibiity conditions of the SEP. The point of contention may be if there are employees in the 401(k) plan who are "eligible" and do not receive a SEP contribution, they may be entitled to a benefit under Top Heavy provisions. For top heavy, I typically do not "as of" contributions back into the balances for non-pension plans, but in this case (being the first year), it may be a conservative approach.

There is nothing by statue that would preclude a SEP from being rolled into a 401(k) plan. Also, there is no formal SEP termination process like that of a qualified plan.

In the end, based on the employee base, your actions could vary. It appears as if the client would've been better off not establishing the 401(k) plan.

Just providing a few thoughts, but cannot provide a clear action plan without more information.

Good Luck!


Thank you very much for you thoughts! This was my thought process as well, but could not get confident in my findings. So I was a little hesitant to give any guidance.

I really love this board and all the input that is given. Sometimes you just need a little 'forehead slap' to wake you up!

Edited by Boots, 11 August 2011 - 09:05 AM.


#4 ETA Consulting LLC

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Posted 11 August 2011 - 09:22 AM

I really love this board and all the input that is given. Sometimes you just need a little 'forehead slap' to wake you up!


True. There are some heavy-hitters here, but they don't like when you call them out by name. :)
CPC, QPA, QKA, TGPC, ERPA

#5 BeckyD

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Posted 24 August 2011 - 05:14 PM

I too have been trying to find information on this topic. Everything I find indicates cannot "currently" maintain a qualified plan and use the 5305-SEP. But what if the Plan Sponsor notifies the participants that SEP contributions for 2011 will be only from 1/1 through 6/30 because they intend to set up a new 401(k) plan effective 7/1/2011? If the SEP is terminated by providing notice to plan participants, and then they set up the 401(k) plan, they are not having both plans running at the same time, which isn't "currently."

I think a conservative approach would be to "amend" to a prototype SEP document before setting up the new 401(k), but I'm not convinced this would be required since I can't seem to find anything defining currently.

Thoughts?

#6 ETA Consulting LLC

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Posted 24 August 2011 - 05:59 PM

We spoke offline, and after reading I see your point of confusion.

Do not confuse 'writing a SEP to an IRS model form' with setting up a new SEP. The IRS FAQ is merely stating that "IF" a qualified plan is in place, THEN the only way you can fund a SEP for that year would be to use a prototype SEP.

The prototype SEP has language that accounts for the possibility of another plan.

Good Luck!
CPC, QPA, QKA, TGPC, ERPA