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Are catch-ups an "elective deferral described in section 402(g)(3)"?


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Assume a model SARSEP is very top-heavy (see definition of compensation in model below). Does the "net" compensation definition contained in the model document require that elective deferrals are to excluded in computing the top-heavy contribution amount? If so, wouldn't that violate the 416(i)(1)(D)/414(q)(4) top-heavy rules? The model only adds back elective for purposes of the $450 minimum participation compensation requirement (but not for t/h purposes).

If the employer contributed 5 percent to a (top-heavy) model SEP would the first 3 percent have to be allocated any differently than the additional 2 percent?

The model SEP states that compensation doesn't include "employer contributions to the SEP..." However, unlike prototype language, it does not state that compensation "includes" elective deferrals "except where specifically stated otherwise" [sARSEP LRM #7 (3-2002)]

Note:From model SARSEP (pg 3):

Compensation does not include any employer SEP contributions, including elective deferrals. Compensation, for purposes of the $450* rule, is the same, except it includes deferrals made to this SEP and any amount not includible in gross income under section 125 or section 132(f)(4).

● The maximum an employee may elect to defer under this SEP for a year is the smaller of 25% of the employee’s compensation or the limitation under section 402(g), as explained below.

Note: The deferral limit is 25% of compensation (minus any employer SEP contributions, including elective deferrals). Compute this amount using the following formula: Compensation (before subtracting employer SEP contributions) X 20%.

● If you make nonelective contributions to this SEP for a calendar year, or maintain any other SEP to which contributions are made for that calendar year, then contributions to all such SEPs may not exceed the smaller of $40,000* or 25% of

compensation for any employee.

● Catch-up elective deferral contributions (see Section 402(g) Limit below) are not subject to the 25% limit.

From page 4 of model SARSEP--Top-Heavy Requirements

Elective deferrals may not be used to satisfy the minimum contribution requirement under section 416. In any year in which a key employee makes an elective deferral, this SEP is deemed top-heavy for purposes of section 416, and you are required to make a minimum top-heavy contribution under either this SEP or another SEP for each nonkey employee eligible to participate in this SEP.

A key employee under section 416(i)(1) is...

Also consider the changes in the SEP LRM language--

NEW SEP LRM (3-2002):

For purposes of the 25% limitation described in the preceding sentence, a participant's compensation does not include any elective deferral described in Code § 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code §§ 125, 132(f)(4) or 457.

OLD SEP LRM (4-2000)

For purposes of the 15% limitation described in the preceding sentence, a participant's compensation does not include any amounts contributed by the employer pursuant to a salary reduction agreement and which is not includible in the gross income of the employee under Code §§ 125, 402(e)(3), 402(h)(1)(B) or 403(b).

IRC 414(v) lists 402(h) as a section to which the catch-up contribution would have no effect on a limit or taken into account, as follows:

(3) Treatment of contributions--In the case of any contribution to a plan under paragraph (1) --

(A) such contribution shall not, with respect to the year in which the contribution is made --

(i) be subject to any otherwise applicable limitation contained in sections 401(a)(30), 402(h), 403(b), 408, 415©, and 457(b)(2) (determined without regard to section 457(b)(3)), or

(ii) be taken into account in applying such limitations to other contributions or benefits under such plan or any other such plan, and

(B) except as provided in paragraph (4), such plan shall not be treated as failing to meet the requirements of section 401(a)(4), 401(k)(3), 401(k)(11), 403(b)(12), 408(k), 410(b), or 416 by reason of the making of (or the right to make) such contribution.

So, is a catch-up elective contribution an "elective deferral described in section 402(g)(3)"?

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