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SEP Integration: Reduction of $40,000 limit


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I'm with you. Still allowable, but as before you cannot have it if using the IRS Model SEP form. I know that some of the big mutual fund companies used to have prototype SEP documents that allowed for permitted disparity - you might check with some of them to see if they still have them available. Probably someone else on these boards can give you names of some companies who still provide them.

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If I'm remembering this right, you could have permitted disparity, but no individual could get an allocation of more than 15% without consequences. This limit is probably 25% now but I haven't done an integrated SEP since EGTRRA.

Any one else remember this?

Michele

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Yes, integration is permitted in a SEP [iRC 408(k)(3)(D)]. Oftentimes, non-model SEPs have provisions to allow for integration.

NOTE HOWEVER, that the amount that can be allocated to a HC employee, on an exluded basis (generally $40,000), is reduced if the plan is inegrated. [iRC 402(h)(2)(B)]

E.g. If fully integrated at $10,000/5.7%, the $40,000 limit is reduced to $39,430 if a HCE.

E.g. If fully integrated at $84,900/5.7%, the $40,000 limit is reduced to $35,160.70 ($40,000 - (.057 x $84,900)).

SEP documents do not contain provisions relating to the exclusion of SEP contributions by participants. They are found in Section 402(h) of the IRC.

The catch-up amount, if any, can then be contributed in addition to the $40,000 (or reduced $40,000 limit). [iRC 414(v)]

In designing an integrated SEP it is easier to work backwards (using allocations) rather than allocating deductible amounts, especially if self-employed individuals are participants. This is because, the maximum deductible SEP amount can not always be allocated on an excluded basis to participants. [iRC 402(h) and 404(h)]

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  • 2 weeks later...

Note: The reduction to the $40,000 limit in an integrated SEP is equal to the spread percentage times the participant's compensation not in excess of the TWB. For 2002, the maximum offset produces a limit of $35,160.70 ($40,000 - ($84,900 x 5.7%)) ($36,160.70 with catch-up). See following chart for examples of maximum limits for 2002.

Plan................Perc...........................................Reduced

Integ...............of....................... Max................$40,000

Level...............TWB....................Spread............Limit

$84,900..........100%..................5.7%...............$35,160.70

$67,921...........80% + $1............5.4.................$36,128.50

$30,000...........35.3356891%.......4.3.................$38,290.00

$16,980...........20%....................5.7................$39,032.14

* Catch-up contributions may be made in addition to the $40,000 or $40,00 (as reduced) limit. [iRC 414(v)(3)(A)] The maximum spread is 5.7 percent when the integration level is equal to the TWB or is set at 20 percent of TWB or less. The maximum 5.7 percent spread is reduced to 5.4 percent when the integration level is less than the TWB and more than 80 percent of the TWB. If the integration level is set at more than 20 percent of the TWB, but does not exceed 80 percent of the TWB, the maximum spread is 4.3 percent. [iRC 402(h)((2)(B)] QP-SEP Illustrator always uses the maximum spread. Prior to 2002, a contribution based on the prior 15 percent participant exclusion limit was always less than the reduced limit.

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Gary: It's looking like I will need to do the integration calculations for a SEP plan. I thought that the calculations for a SEP would be identical to those for a profit sharing plan. I haven't analyzed your numbers yet, but are you trying to say that the integration calculations are different for a SEP?

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No, not really, the integration rules are the same. However, the $40,000 limit is reduced under the participant exclusion rules of Code Section 402(h)(2)(B) when the plan is integrated AND the individual is an HCE.

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  • 1 month later...

Gary - Doesn't the fact that the limit is reduced from $40,000 take away the advantage gained by the integration of the SEP? At least in a situation where there is only one other eligible employee who makes, say $10,000 in compensation, it would be better to switch to a non-integrated SEP, right?

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Lynn, doesn't this depend on the level of compensation that the individual who sponsors the SEP actually makes? At $200,000, with your hypothetical $10,000 employee, a non-integrated SEP will yield $40,000 for the HCE and $2,000 for the NHCE. A fully integrated SEP at the $10,000 level will yield a contribution of $39,430 and $1,430, if I've done my calculations right. (You have! Hi Mike) . Each individual is reduced by $570

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For 2002, a $37,019.70 contribution (14.3% base percentage / $84,900 TWB / 5.7% spread) will yield:

$35,160.70 for Owner (HCE) earning $800,000.

[$40,000 if not ingegrated.]

$1,859.00 for employee with $13,000 (W-2).

[$2,600 if not integrated.]

The IRC 402(h)(2)(B)/HCE limit is:

$35,160.70 = $40,000 - ($84,900 x .057)

Base Percentage equals 14.3% ($35,160.70 - [($200,000 - $84,9000) x .057] / $200,000). [Here, $200,000 is the EI as computed under IRC 401©(2), then capped at the $200,000 limit.]

Here, with only one employee, for an extra $741, the owner can get an additional contribution of $4,839.30. Thus, it appears that it would be better to duplicate benefits (i.e., by not integrating contributions with social security) and contribute $42,600.

Although the defined contribution plan integration rules now apply to SEPs, the IRC 402(h)(2)(B) reduction causes the integration benefit to be "offset" against the maximum limit. When SEPs had there own integration rules, the maximum limit was also offset by the TWB times the O.A.S.D.I. rate (5.7%) for all employees. Any amount that exceeds the limit is reportable on Form W-2 as "wages" or not deducted if self-employed.

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IRC 402(h) was created in 1986, effective in 1989. But that's not really the beginning.

The prior SEP limit of 15 percent, the old DC 415 limit, the TWB limit, and the considered compensation limits haven't made the reduction apply for many years (1994-2001); that is, the maximum contribution limit was always far below the reduced 415 limit. In earlier years (and after 1986) the high compensation limit caused a reduction of the $30,000 limit under 415.

For years prior to 1986, see 408(k)(3) as it then existed. It also allowed for integration--of the "offset" type. When the law was changed and 402(h)(2) came into existane (and changing 408(k)(3)) the legistlative history stated: "Subparaghs (D) and (E) of section 408(k)(3)...AS IN EFFECT BEFORE the amendments made by this section SHALL CONTINUE to apply"...[then regarding SARSEPs] "may not be integrated." {Emphesis added.} [see PL 99-514, Sec 1108(h)(2), as added by PL 100-647, Sec 1011(f)(7) (the technical corrections)]

Note: The concept originally applied to the maximum contribution which as a stated dollar amount ($7,500, $15,000, $30,000) was "offset" by another amount (5.7% of compensation up to the TWB limit) if integrated [this was before the 402(h)(2)(B)/415 tie in in 1986].

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