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Participate in PS Plan?


Guest MEWilson
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Guest MEWilson

A sole proprietor has a SEP for which no contribution was made for 2002. During 2002, sole proprietor became a participating employer in a company's profit sharing plan. Can the sole proprietor contribute to the profit sharing plan in which he is a participating employer instead of the SEP?

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Could you provide some more detail on the relationship between the sole proprietorship and the entity that sponsors the PS retirement plan. Is a tax exempt-entity involved? Are the entities related, controlled, or affiliated under the Code? Does individual own more than 50% of other entity? Is the PS sponsor under extension for 2002? Sole proprietors generally do not participate in the plans of other entities unless they are related, controlled, or affiliated with such other entity and the plan includes them. Does individual also have W-2 income from entity sponsoring plan?

In general, an individual may be able to maintain SEP as a sole-proprietor and also be a participant in an unrelated "employer's" plan to the extent of his or her compensation from the employer maintaining that plan.

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Guest MEWilson

Wife owns a corporation and established a 401(k) Plan effective 1/1/2002. Husband has a sole proprietorship and has the SEP for a few years. The corp is of course on extension for 2002 and they will be making contribution Friday. Husband does not have W-2 Income from the sponoring corporation. His contribution was calc'd based on Sch C income. He has not made a deposit to the SEP for 2002.

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I believe the answer to your question is "no" (unless the entities file a consolidated return; which I doubt they do or could qualify for) But, JIC, can you explain what "became a participating employer in a company's profit sharing plan" means. What documentation is there? Is this a community property state?

Where contributions ever made to the SEP (were employees of corporation that wd have been eligible also covered by SEP)? Are there other employee's in wife's corporation.

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Guest MEWilson

Became a participating employer means just that. I don't know how else to explain that. He signed a supplemental participation agreement.

Thanks for your responses.

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Okay, the Sole-Proprietorship adopted the P/S plan in 2002. Therefore, the individual could be eligible under the plan. The plan wd normally define his compensation as his earned income. The contribution, however, wd have to be made by the entity that adopted the plan (and that entity does not appear to be under extension). Thus, any contribution made after the due date may not be contributed or deducted for the 2002 tax year. If the sole-proprietor was under extension, things wd be different. If the sole-proprietor has common-law employees, the P/S plan may become discriminatory (if contributions are made to it for 2002) because of the "controlled" group rules that treat all employees of all members of the controlled group as if treated by a single employer.

Arguably, the corporation could make the contribution, but the amount would not be deductible (not ordinary and necessary) and would be subject to a cummulative (forever) 10% penalty tax (unless and until corrected).

If this were a community property state, it may be possible for controlled group status to be avoided under the noninvolvment exception to spousal attribution (if so, see IRC 1563(e)(5)).

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