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Is compensation based only on the calendar year in the case of a fiscal year SEP Plan?


katieinny
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Absolutely. Contributions and deduction limits will then be based on compensation paid during the fiscal year. As you may know, the applicable compensation cap is that which is in effect in the calendar year that includes the beginning of the fiscal year. For example a plan that operates on a May to April…for the plan year May 2003 to April 2004, the compensation cap of $200,000 would apply- not the 2004 compensation cap of $205,000

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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Okay, now let me take it a step further.

The fiscal year plan will be set up for the period from 10/1/02 to 9/30/03. Then the employer is converting to a calendar year, so there will be a short year from 10/1/03 to 12/31/03.

I'm thinking that the annual 415 limit (40,000) applies for the fiscal year, then a prorated 415 limit (10,000) applies for the short year.

Do you agree?

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Also note that service during the short plan year counts as a service year for purposes of the 3 out of the last 5 year participation rule. Such an employee must also receive a contribution for the short plan year if he or she would have been entitled to a contribution for the year in which the short plan year begins if there had be no change.

Note: If the plan year was not the same as the employer's taxable year, the deduction limit would be based on compensation for the CY ending within the employer's taxable year. [iRC 404(a)(3)]

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