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Obtain IRS ruling on individually designed SEP?


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Any thoughts on what is standard practice with individually designed SEPs on whether to apply for an IRS ruling or not?

I'm working with an individually designed SEP that has a non-standard definition of compensation, but I'm confident the definition satisfies Code § 414(s) & regulations. Of course, an IRS ruling on it (& the plan) would be the most conservative route. Before I discuss with the employer whether to spend the money on a ruling, though, I'd like to know what other individually designed plans are doing.

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Have you checked to see if any rulings have already been issued which might give some guidance as to what might be allowed?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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No, though that's a good idea. But even if I'm able to find favorable rulings, it's still just me saying that the plan follows the law. The question remains, is getting a PLR worth the added certainty? It would help the analysis to know whether it's common or rare for individually designed SEPs to get PLRs.

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Not having any idea how many individually designed plans there are makes it difficult to compare with the few PLRs that might have been issued. But the same thing is true of all other items. Neither the number of issued PLRs or the lack of them gives any insight.

However, it is quite possible, as with many other items, that the issued PLRs give enough pros and cons to allow you to make a decision as to the viability of applying for one for this particular plan design.

Considering the cost to have an application drafted plus any IRS fee, it probably is not economically sensible. Which then raises the question of the feasibility of using an individually designed SEP in the first place. Is it really necessary and is it really individually designed? What makes you call it individually designed?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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For starters, its compensation definition is W-2 wages, less moving expenses, less irregular/additional compensation (this latter is to exclude retention payments, which are important to the employer to exclude).

I've determined this satisfies § 414(s) under Treas. Reg. § 1.414(s)-1(d)(1), through Treas. Reg. §§ 1.414(s)-1(d)(2)(i), 1.414(s)-1(d)(2)(ii), and 1.414(s)-1(d)(3)(i) (I am assuming that the exclusion of retention payments is nondiscriminatory, in that it will reduce HCE's compensation on average more than Non-HCEs). This is the main area where a PLR could have some benefit. I have not looked yet whether there are any PLRs already issued on this or a similar definition.

Next, it's a government plan following the grandfathered compensation limit rule of Reg. § 1.401(a)(17)-1(d)(4)(ii), which for 2005 is $315,000 (as opposed to the "normal" 401(a)(17) limit of $205,000). There's at least one participant who is affected by this rule.

The SEP LRMs don't have language for either item and I doubt there are any prototypes out there allowing these options.

For now, we'll probably hold off on a PLR, but I will check PLRs for compensation definition rulings--thanks for the suggestion.

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What is a retention payment?

As a govermental agency, Are you sure that they are eligible for a SEP?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Broadly speaking, a retention payment is a payment made after the employee completes a specific period of service, like a bonus--e.g., if the employee works for the employer for three years, after that three years the employee will receive an additional payment of compensation. I have not been asked to look at the retention agreements so do not have specifics.

I should clarify that the employer is a non-federal governmental employer. Nothing in § 408(k) prohibits these from sponsoring a SEP, although state or local governments, their political subdivisions, etc., cannot sponsor a SARSEP, per § 408(k)(6)(E). See also Gary Lesser's SIMPLE, SEP & SARSEP Answer Book, Q 2:22.

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Unfortunately, I do not have a copy of the book. I do nothing in that area that requires any in depth research or knowledge.

I have been trying to imagine what sort of entity this could be. Outside of the statutory entities like the USPS etc, I cannot think of anything than would not be a political subdivision and therefore ineligible. What did I miss?

Look at what happened with Credit Unions where because the operate under a federal charter, they are regarded as governmental entities. The link is even tighter outside the Federal circle, which is why I find it difficult to think of an entity that would not be a political subdivision or other ineligible entity.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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There are no PLRs on individualoly designed SEPs that deal with a compensation definition issue. Most have dealt with coordination (under prior law) with Code Section 415. It might be worth reading the SEP List of Required Modifications (attached) for prototypes and submit your i.d. plan's definition. Good luck. Please let me now if you are sucessful.

SEP_LRM_2002.pdf

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For what it's worth, I've pasted the plan's full "Compensation" definition below.

I've looked at numerous IRS PLRs on SEPs. They are uniformly cursory; no useful analysis. Based on the IRS' apparent lack of concern in the area, I feel more comfortable in advising the employer that a PLR may not be worth the cost.

"Compensation" means wages within the meaning of Code Section 3401 (a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation, however, shall not include amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Code Section 217. Compensation shall also exclude all payments to Employees under retention agreements with the Employer and such payments are hereby deemed irregular or additional compensation properly excludable from compensation under Section § 1.414(s)-1 of the Code of Federal Regulations. Compensation under this Section must be determined without regard to any rules under Code Section 3401 (a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).

"Compensation" shall also include: (a) elective contributions that are made by the Employer on behalf of its Employees that are not includible in gross income under Code Sections 125, 402(e)(3), 402(h) or 403(b); (2) compensation deferred under an eligible deferred compensation plan within the meaning of Code Section 457(b); and (3) Employee contributions under governmental plans described in Code Section 414(h)(2) that are picked up by the employing unit and thus are treated as Employer contributions.

For any self-employed individual covered under the Plan, Compensation means earned income within the meaning of Code Section 401©(1) but determined without regard to any exclusion under Code Section 911.

Compensation shall include only that compensation that is actually paid or made available to the Participant during the Plan Year.

In addition to other applicable limitations set forth in the Plan, the annual Compensation of each Employee taken into account under the Plan shall not exceed $200,000, as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B) ("annual Compensation limit"). If the Plan determines Compensation for a period of time that contains fewer than 12 months, the annual Compensation limit shall be an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12.

Notwithstanding anything in the Plan to the contrary, the following special transitional rule for governmental plans shall apply to certain Participants in lieu of the annual Compensation limit in the preceding paragraph to the extent provided under Section 1.401(a)(17)-1(d)(4)(ii) of the Regulations under the Code:

Any Participant who first became a Participant in the Plan prior to January 1, 1995, shall have his or her Compensation determined using the limit on Compensation in effect on July 1, 1993, provided that the annual Compensation limit that would otherwise apply under Code Section 401(a)(17) has the effect of reducing the limit on Compensation in effect on July 1, 1993.

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Gary

Can a non-federal governmental entity sponsor a SEP?

As I understand the term "non-federal governmental agency", it means a state or local goverment and their political subdivisions etc. Am I correct that these are employers who are not eligible to sponsor a SEP?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GBurns - - SEP yes, but not a SARSEP. See IRC 408(k)(6)(E) regarding govies and TE organizations. State enabling statutes, if applicable, must permit adoption.

jstorch - - Regarding the modified definition of compensation. I'd get a PLR. A demonstration that such definition is not discriminatory will probably be requested if not includied in the submission. Is it discriminatory (why else would it be done)? Can you find a statutory exclusion for such payments? "Deeming" the payment as something doesn't always make it such. If retention payments were limited to HCEs, then the definition would not likely be discriminatory. If it works, consider a maximum compensation limit instead. IMO, the retention payment exclusion is not for working "outside of their regulary scheduled tour of duty" and wd not necessarily qualify like a bonus under the safe-harbor alternative definition. See 1.414(s)-1(d)

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