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SEP IRA--Using the integrated formula


Guest ButchElfers
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Guest ButchElfers

If we use the integrated formula for SEP IRA's, are we limited to deferring 5.7% of compensation or can we go above. Here is how I understand the integration formula works:

Joe Blow makes $200,000 and the other employees make less than $50,000. Joe Blows Contribution will be:

$200,000 x .057= $11,400.00

($200,000 - 84,900 TWB) x .057 = $6,560.70

then all future contribs will be paid out based on the proportionate formula:

$200,000 x 11.01965% = $22,039.30

We then would only have to make an employer contribution of approx 16.71965% for the rank and file.

Please enlighten me if I am incorrect.

Thanks,

Butch

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I assume you are calculating for 2002 since you are using $84,900???

The maximum spread is 5.7%. You can go below 5.7 if the plan document permits…

If you go below 5.7, the following limits apply

$0-$16,980 Permitted disparity factor is 5.7%

> $16,980 but < or = $67,920 Permitted disparity factor is 4.3%

> $67,920 but < or = $84,899 Permitted disparity factor is 5.4 %

$84,900 Permitted disparity factor is 5.7 %

The first step in your calculation appears to be incorrect. Anyway, I think we would need to know the compensation for the other employees in order to determine if the calculation is accurate

Some additional comments/reminders which you may already be aware of but may benefit others who are not

-Be aware of the 25% /$40,000 limit

-Can’t integrate with social security if using the 5305-SEP or 5305A-SEP form

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Note, too, that $40,000 is NOT an achievable result in an integrated SEP plan for an HCE on an excludible basis.

In your example, the owner could get the $6,560.70, if all employee (including the owner) received a 5.7 percent contribution. The owner wd get $6,560.70 + $11,400; well beneath the $35,160.70 maximum exclusion limit amount for 2002.

If a corporate SEP is integrated at the TWB, the $40,000 exclusion limit is reduced to $35,160.70 ($40,000 - ($84,900 - 0.057)) if the individual is a HCE. [iRC 402(h)(2)(B)] As pointed out above, the maxmum spread is 5.7% (when integrated at the TWB and if all employees get at least a 5.7% of compensation contribution).

$200,000 - $84,900 = excess compensation = $115,100

$115,110 x 0.057 = $6,560.70

$35,160.70 - $6,560.70 = 0.142999980

$200,000

So, if individual's not earning in excess of the TWB receive a contribution of 14.3 percent, the owner could receive $35,160.70.

If there were 2 employees earning $45,000 each (my assuption), this plan would cost $48,030.69.

If the plan were integrated at $69,601 (80% TWB + $1) instead, the employees would receive 14.6 percent, but the owner would receive more, $36,241.55 (the effect of a lower spread on the lower integration level). Although the cost of this plan is $49,381.55, the owner would recieve $1,080 of the additional $1,351 cost (80% effective).

If self-employed, other factors would have to be considered.

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  • 1 year later...
Guest Elfman

Hi Gary,

Not sure if you will get this since the last entry was so long ago.

Are the rules still the same besides the inflation adjusted numbers?

Where would a plan sponsor go to have a document drafted for this? Is there a prototype we can use which is similar to the 5305 form?

Is the definition of HCE the same as for a 401k plan?

What is meant in your first sentence by the phrase "on an excludable basis"?

Thanks,

Elfman

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Are the rules still the same besides the inflation adjusted numbers?

Not sure what you mean??

Where would a plan sponsor go to have a document drafted for this? Is there a prototype we can use which is similar to the 5305 form?

Many financial institutions have prototype SEPs that may be integrated with Social Security

Is the definition of HCE the same as for a 401k plan?

Possibly, the document should give you several choices to choose from.

What is meant in your first sentence by the phrase "on an excludable basis"?

Amounts that exceed 25% of "taxable" compensation (plus catch-up contributions if SARSEP) are included in income. Amounts that exceed the reduced upper limit are also included in income. Assume plan integrated at $90,000 and the participant earns $200,000 for 2005. The plan uses the maximum spread of 5.7%. The upper limit is reduced by the result of multiplying 5.7% times the lesser of $200,000 or $90,000. Thus, the $42,000 limit is reduced to $36,870. Thus, $36,870 (plus catch-up contributions) is the most that can be contributed and excluded from this participant's gross income.

The plan will provide a method to allocate an integrated contribution. Generally a four step method is used. Software is available to crunch the numbers, see--QP-SEP Software Link

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