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SARSEP limits


betheeg
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For 2002:

1. what are the maximum deferral limits in a SARSEP?

2. what is the maximum % of compensation you can use?

3. do you include deferrals in compensation when calculating the max % or do you have to deduct them like you used to?

4. do SARSEP's have to do ADP testing?

5. what is the allowable catch up contribution?

Also, I have read that the maximum deferral amt may have been changed to 25% of taxable comp....20% of gross comp. Can someone explain this to me? is this the same as the 13.04% when it was 15%? (not that i really understood that either.)

I don't deal with SARSEP's at all, and don't know if they were included with the EGTRRA changes. I think I read something some time ago with some technical corrections made to EGTRRA included with the JCWAA which affected SEP's, but would like the opinion of someone with more experience with SARSEP's then I have before I jump to any conclusions.

thanks for any help....

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  • 2 weeks later...

There are no fewer than eight separate limits that apply to a SEP/SARSEP.

1. The 25% deduction limit

2. The 25% exclusion limit

3. The $40,000 contribution limit (reduced if integrated SEP)

4. The 100% of compensation limit

5. The excess deferral limit ($11,000 for 2002, $12,000 for 2003)

6. The catch-up limit ($1,00 for 2002, $2,000 for 2003)

7. The excess contribution limit (or ADP = 125% if HCE)

8. The 50% rate participation test if SARSEP.

SOFTWARE to crunch these numbers is available from:

A. AQS

Robert Garrels

303.465.4669

B. GSL Galactic Consulting

Gary Lesser

317.254.0385

SEPs and SARSEPs have a unigue rule that limits the amount that can be allocated on an excluded basis to each participant. That limit is 25% of includible taxable compensation. Thus, e/er and employee contributions (assume $100,000 of pre-plan compensation) sd not exceed 25% of net compensation. So, if the e/ee elects to defer $2,000 as a pure elective, then the 25% limit is based on $98,000. Assume the individual was a HCE, and his 125% ADP limit is 1% or $1,000. Then the 25% amount would be based on $99,000 (or $24,750). If age 50 or over, then the excess wd be treated as a catch-up (up to $1,000 for 2002), thus the individual's excludable contribution limit is $25,750.

If only elective contributions are made, then 20% of gross equals 25% of net. If e/ee, age 51, deferred the $12,000 maximum for 2002, then 25% of $89,000 ($100,000 - $11,000 subject to testing) plus $1,000 = $23,250.

There is also a 100% limit, but with catch up contributions aside, the 25% limit will always be lower. There is a $40,000 limit (which is reduced if the plan is integrated) -- see note below.

The employer's deduction limit is 25% of gross compensation, but it can not always be allocated on an excludable basis.

All that being said, if the individual is self-employed, compensation means earned income. That's the pre-plan net profits which have been reduced for e/er contributions to non owners and then further reduced for 1/2 of the SE tax deduction, all contributions made for owner, and so on. Now for allocations and deduction purposes we can add back the pure elective and catch up (e.g., use $100,000). For exclusion purposes, however, the pure elective needs to be subtracted (e.g., use $89.000) for calculating the 25% participant exclusion limit.

It is easier to work backwards in a SEP (i.e., contribute the amount that can be allocated and get a deduction for all of it.

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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