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Leased Employees


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Yes. If the employee meets the IRS's "leased employee" requirements .... and meets the SEP's eligibility requirements, then he must be allowed to participate in the SEP.

However, an exception does exist. He can't participate in the SEP if all three of the following are true.

1) Leased employees represent less than 20% of the SEP employer's work force.

2)He is qualified to participate in the leasing company's plan.

3) The leasing company's plan is a money purchase pension that allows immediate participation, full immediate vesting, non-integrated, and rate of at least 10%.

Also, Yes the SEP employer can reduce his SEP allocation by the amount that leasing company contributes for the leased employee (to the leasing company's plan).

So, the SEP employer is at the mercy of the leasing company to furnish the SEP employer with deatils about the leasing company's plan.

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A prototype document must be used if the employer has any leased employees. If a leased employee is treated as an employee under IRC 414(n), then the SEP must include them if the leased employee is otherwise eligible.

I am unaware that there can be any reduction/offset of a SEP contribution (if amounts are contributed on behalf of the leased employee by the leasing company to its own plan). Is there a cite for this?

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Under the leased employee rules, the lessee (the SEP employer in this discussion), must treat the contribution made by the leasing organization (for the leased employee) as if the lessee paid it..... when the lessee computes the IRC 415 limits on contributions.

If the lessee's inclusion of the leasing company's contribution (for the leased employee) causes the 415 limits to be exceeded by the lessee.... then the lessee can reduce (offset) it's own contribution (for the leased employe) by the amount of the leasing organization's contribution, and thus force 415 compliance.

However, this ability to "offset" must be specifically allowed in the plan document of the lessee.

So, if your plan document does not state that you may reduce/offset your contribution (for the leased employee) by the leasing organization's contribution (for the leased employee) .... then you (the lessee) cannot offset.

This applies to all qualified plans. A SEP is a qualified plan.

Even without the 415 failure issue, the plan document can profide that offset is allowed.

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Guest BobParks

This is an interesting thread but the last statement confuses me.

I have been under the impression that a SEP is not a "qualified" plan.

"A simplified employee pension (SEP) is a traditional individual retirement account or individual retirement annuity which may accept an expanded rate of contributions from one or more employers. IRC Sec. 408(k). It is owned by the employee, who may be self-employed." Tax Facts 1, Q. 249

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Although a SEP may be "treated" as a qualified plan for many purposes, it is not a "qualified plan;" that is, a SEP does not meet the requirement under 401(a) for an exempt trust under 501(a).

The SEP LRMs do not provide for any offset of SEP contributions for a leased employee treated as an employee of the employer to adhere to 415. In fact, under 415, a SEP is generally the last plan disqualified (and corrections made in the qualified plan). Have you seen any SEP documents that contain such language (when the safe harbor 20% MP contribution is NOT made, IRC 414(n))? While SEPs are subject to 415 (and 414(n)), I do not recall that the documents need to mention anything about the 25% limits under 404 or 415.

I'd be interested in more information on this point.

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Gary - My point is that the offset is allowed if specifically provided for in the plan document. It doesn't matter if the lessee's plan is a SEP or a trust plan (qualified). The offset is allowed whenever it is provided in the plan document (regardless of 415). However, the most common use of the offset is to force 415 compliance.

SEPs (just as a qualified plan) can use either a prototype or an individually designed document. I've never knew that having leased employees required a plan to adopt a prototype.

There is not much more I can say on the matter. Maybe Mr. Derrin Watson (a guru that used to post replys) will come to my rescue ( or maybe he'll disagree with me). Anyway I'm just a country boy trying my best, although I would feel bad if I gave Nancy bad info.

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