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"Terminated" SAR-SEP replaced w/ Safe Harbor 401(k)

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Client maintained a SAR-SEP into which they were making a discretionary employer integrated profit sharing contribution after the end of the plan year. They "terminated" the SAR-SEP in August, 2002. Is employer permitted to fund a discretionary profit sharing contribution even though the plan is terminated. If so, would you count compensation from January to August...or for the whole year to determine amount of contribution?

Same client adopted a Safe Harbor 401(k) in September, 2002. This plan also contains a discretionary integrated profit sharing contribution.

HCE #1 wants to get $40,000 into his account during 2002. I guess my bottom line question is how do we get there with the scenario listed above. Or do we just forget about the SAR-SEP and only fund the new 401k plan?

Sorry if this question is not clear....I've just confused myself!


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For starters, assuming the SARSEP is otherwise okay, the employer contributions reduce the otherwise applicable P/S limit and the elective contributions have to be tested under each plan separately. The elective are in a sense aggregated and may not exceed the 402(g) and catch-up limit. Compensation for the full year is generally used in these situations.

If the SARSEP is bad (not available for year, fail to make T-H contribution to plan designated in the SEP) then it can be ignored if all SEP and SARSEP contributions shown on Form W-2 for 2002.

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  • 3 weeks later...

Gary, I think I understand your first paragraph. But not sure I'm clear on the second. The plan is top heavy, but no minimum contributions have been made yet. Do we need to make the minimum contribution even though it is "terminated". If so do we use compensation to determine minimum contribution from the beginning of the plan year to time the plan is terminated?

I guess you could say that the plan was no longer available after August.



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You said they were making integrated contributions. But now we are only talking about T-H contributions??? I'm generally confused, but here goes.

If the SASEP doesn't get its T-H contribution (using compensation for the full year (and for the 125% rate), and assuming the document doesn't provide that any require T-H contribution is to be made into a different plan (which is generally an option)), but is otherwise okay, then it becomes a bad SARSEP and all contributions sd be shown on W-2. How to treat the elective amounts for ADP/402(g) in the QP is beyond my expertise. Arguably they have been "returned" when shown on the Form W-2. What do the drafters of the qualified plan say about this (what does the QP plan say?)?

If the T-H contribution is made to the SEP/SARSEP, then one has to look at the qualified plan to see if it can be avoided there. Are all affected employees getting the required contribution.

I assume that you have the same coverage in both plans as both may be top-heavy.

If integrated contributions are made to both plans then there may be a discrimination issues as well. This should ALL be resolved with a Qualified Plan consultant Whether it is best to collapse the SARSEP (by failure to mke the T-H contibution, etc) or something else sd be coordinated with the administrator of the QP.

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