25% Prototype SEP Allocation Limit

[Gary Lesser]

Assume a prototype SEP included elective contributions in its definition of compensation and allocations are made comp-to-comp. How do you or plan sponsors you work with interprete the 25% allocation limit specified (see LRM language below) in the plan--25% of compensation excluding ALL elective amounts or just excluding normal elective contributions?

From SEP LRM--(3/2002, page 5)

In no event can the amount allocated to each participant's IRA exceed the lesser of 25% of the participant's compensation or $40,000, as adjusted under Code § 415(d). 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.

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)"? If so, it would reduce the exclusion allowance under Code Section 402(h) which it is not supposed to do..