SARSEP, 401(k) Combination

[Guest JROSSITTER]

May an employer establish a 401(k) solely to match SARSEP deferrals? If so, are there any pitfalls in doing so?

[saabraa]

For starters, matches aren't permitted in a SEP. Though you might assert the match need only worry about the 401(m) nondiscrimination test, you'd still be subject to a SEP's uniform allocation rule at 408(k)(3) of the IRC.

[Guest JROSSITTER]

The match would not be done in the (SAR)SEP, but in the QP, where the ACP test would be done.

[saabraa]

But ultimately the substance of the arrangement IS part of the SEP. I picture the qualified plan document allocation provision referencing the SEP. There's no way around that.

[Guest JROSSITTER]

Saabraa:

What is the concern with substance when we are talking about tax law?

I don’t see how 408(k) provisions can apply to a situation that is not reflected in the SARSEP document and that does not result in deposits to any SEP-IRA accounts. Moreover, if you trace through the “matching contribution” and “elective deferral” definitions in 401(m), it is clear that SARSEP deferral matches are included. If such matches are subject to ACP testing, it would be a strange kind of statutory construction to conclude that they are not permissible in the first place.

Of course, I don’t know why an employer would want to adopt such an arrangement, but, other than the fact that I have never heard of it being done, I have not yet found any convincing reason why it could not be. That was the reason for my post.

[saabraa]

After hitting the books for a bit, I must agree nothing convincing jumped out. Pursuing it from the 401(m) end, I got into the thicket of code and regs under 401a4, 401m, 402g, 414(l), et al. Like you say, some hurdles are cleared; the definition of elective deferral is solidly met----or is it? There's language regarding such contributions as those being made to a plan, or to a defined contribution plan & ultimately there could be a hangup (requiring the elective deferral to be part of a 401a plan). At this point it's unclear to me, but if it's theoretical, like you suggested, I'm gonna let it go. Parting comment; I wouldn't go there (to such a plan configuration).

[Guest JROSSITTER]

Thanks for taking the time. I recommended that it not be done without filing for a determination letter. I can't imagine that it would be worth it to do that. It's an interesting issue though. I wonder how many SARSEPs are still out there.

[Guest JROSSITTER]

SARSEP has different eligibility requirements than QP. Coordinating things so that the QP didn’t exclude folks (indirectly, by matching only SARSEP participants) who met QP eligibility requirements could be the fatal flaw. Immediate eligibility in both plans could solve this, but enough—my head hurts.