SEP AND 401k - in same year

[Zoey]

Ok, let's put aside the fact that why would anyone WANT both a SEP and 401k Plan for a moment...

I have a potential client who currently has a SEP plan. He is a sole proprietor. During 2009, he also became an S-Corp (so he will have both SE income and W-2 income) and now has one employee and wants to start a 401k Plan also (before the end of the year). (FYI - His SEP is a 5305 Model SEP.) I assume he can maintain both, but the million dollar question is, can he contribute to both the SEP and the 401k for 2009? I realize he will have a combined limit, but can it be done?

Thanks so much for all of your help in advance.

[Zoey]

Anyone?

Thanks.

[mbozek]

Ok, let's put aside the fact that why would anyone WANT both a SEP and 401k Plan for a moment...

I have a potential client who currently has a SEP plan. He is a sole proprietor. During 2009, he also became an S-Corp (so he will have both SE income and W-2 income) and now has one employee and wants to start a 401k Plan also (before the end of the year). (FYI - His SEP is a 5305 Model SEP.) I assume he can maintain both, but the million dollar question is, can he contribute to both the SEP and the 401k for 2009? I realize he will have a combined limit, but can it be done?

Thanks so much for all of your help in advance.

An employer can contribute to both a SEP and 401k plan in the same year but the plans are subject to a single DC limit. However some IRS model SEP plans do not allow the employer to maintain another plan. You need to read the IRS model document.

[jevd]

Ok, let's put aside the fact that why would anyone WANT both a SEP and 401k Plan for a moment...

I have a potential client who currently has a SEP plan. He is a sole proprietor. During 2009, he also became an S-Corp (so he will have both SE income and W-2 income) and now has one employee and wants to start a 401k Plan also (before the end of the year). (FYI - His SEP is a 5305 Model SEP.) I assume he can maintain both, but the million dollar question is, can he contribute to both the SEP and the 401k for 2009? I realize he will have a combined limit, but can it be done?

Thanks so much for all of your help in advance.

An employer can contribute to both a SEP and 401k plan in the same year but the plans are subject to a single DC limit. However some IRS model SEP plans do not allow the employer to maintain another plan. You need to read the IRS model document.

I agree with MBOZEK and in fact the IRS Model 5305 specifically disallows the use of any other plan if the 5305-SEP is being used for the SEP. See instructions for the form Here

A prototype or Individually designed plan document is required if the employer wishes to combine a SEP with any other qualified plan other than another SEP.

[Bird]

Agreed, it can be done, subject to document limitations. One reason for doing it it - in a one-man plan, if you keep the 'er contributions in the SEP you keep the qualified plan assets (the k-only plan) to a minimum and defer the need to file a tax return. That's pushing the envelope of cheapness and/or avoiding work, but why not? In a plan with employees, I'd be more inclined to keep it under one roof.

[Zoey]

Thank you so much for your responses. All 3 of you are my favorite responders because you are so knowledgable.

I just want to be sure I understand...

Since he is using a Model 5305 SEP, not only can he not contribute to both the SEP and 401(k), but he cannot maintain both in the same year either?

[jevd]

Thank you so much for your responses. All 3 of you are my favorite responders because you are so knowledgable.

I just want to be sure I understand...

Since he is using a Model 5305 SEP, not only can he not contribute to both the SEP and 401(k), but he cannot maintain both in the same year either?

First, thank you for the kind words. There are many knowledgable posters here, each in their own fields.

Your assumptions are correct. If he were to establish (amend) the SEP under a Prototype or Individually designed SEP document, then he could contribute to both the SEP and 401(k) subject to the appripriate limits.

[Zoey]

Thanks.

I'm just curious, would it matter if it were two separate companies? (One company in which he is a sole proprietor, and one company in which he is an S-Corp and has one employee?) I would assume it would if it were a controlled group or an affiliated service group, but what if they were two totally unrelated companies?

Thanks again.

[masteff]

Control group speaks to common ownership, not to similarities/differences of business structure or activity (unless someone thinks you could make QSLOB work). The only real question is what percent of the S-corp does he own?

[Zoey]

If he was 100% owner of both (which he is), I guess it would be a stupid question. I was asking hypothetically, if he wasn't. (I was just curious.) I would assume though, that if it isn't a controlled group or an affiliated service group, that why wouldn't he be able to maintain both and contribute to both (still subject to limitations)? I think I just answered by own question. ha!

Also, by no means did I mean to insinuate that other posters are not knowledgable. I know there are a lot of knowledgable posters out there and I appreciate all of their input. Masteff is also one of them. Because there are so many knowledgable people on here, is why I look to these message boards.

Thank you all for your responses.

[Guest lerieleech]

I guess I'm beating a horse that has been dead for nearly a year here, but am I to understand from this that if a SEP is established, say in 2010, using Form 5305-SEP, and the plan is still in existence in 2011, then a 401k or DB cannot be established in 2011 even if no 2011 contribution is made to the SEP?

[jevd]

I guess I'm beating a horse that has been dead for nearly a year here, but am I to understand from this that if a SEP is established, say in 2010, using Form 5305-SEP, and the plan is still in existence in 2011, then a 401k or DB cannot be established in 2011 even if no 2011 contribution is made to the SEP?

If I were in that position, I would terminate my SEP for 2011 by notifying the trustee/custodian that no further contributions would be made to the SEP.

P.S.

Hi All. I'm back. I've been on the sidelines for seven months. A victim of the current economy and have been busy trying to correct it. I may just have solved that problem but too soon to tell.

Regards to all.

JEVD

Making the complex understandable.