SARSEP Maximum Elective with Employer Contribution

[Guest Roger K.]

Trying to determine maximum employee elective deferral contribution if employer contributes 10%. Would the maximum employee deferral be 15% or 12%.

Example: gross comp = $10,000 with elective deferal of 12%. Max limit = $8,800 x 25% = 2,200. $1,200 EE + $1,000 ER = $2,200 max?

or gross comp = $10,000 with elective deferral of 15%. Max limit = 10,000 x 25% =2,500. $1,500 EE + $1,000 ER = 2,500 max?

CCH states the ER's deduction is limited to 25% of the aggregate compensation paid to the participating EE. Also, for tax years beginning after 12/31/01, the EE's compensation will include elective deferral for purposes of calculating the deduction limit.

Based upon that last sentence, would the employee's compensation including elective deferrals be $10,000 or $8,800 in the prior example.

Any help would be appreciated as I cannot find much on this subject since SARSEP's were eliminated after 96 except for grandfathered in plans.

Thanks,

RK

[Bird]

How 'bout this:

Comp = $10,000.

Employer 10% = $1,000.

Max total = 100% of pay = $10,000.

Max deferral = $9,000.

It could be argued that the maximum deferral is $10,000 and the employer's contribution is the one to be limited; depends on plan language, but I don't think we have to go there.

The 25% limit is on employER contributions; the employEE contributions are just part of the employer's payroll and (after 2001) don't count against that limit.

[Gary Lesser]

Assuming an X percent employer contribution to a SEP, the following formula can be used to determine the maximum elective deferral. Catch-up contributions may be made (and deducted) in addition to the amount determine under the 25 percent exclusion allowance.

25 - X (e/er contribution rate)

--------------------------------------- =

1.25

25 - 10

---------------- = 12 percent (maximum elective w/o catch-up)

1.25

Proof:

$10,000 x .12 = $1,200 (plus catch-up contributions (up to $4,000) if applicable)

.25 ($10,000 - $1,200) - (.10 x $10,000) = $1,200

Note: The employers 25 percent deduction limit (based on aggregate compensation) may be higher than the amount that can be excluded under IRC 402(h) which is based on includible compensation. So, the above approach can be used to find the maximum excludible elective amount. Catch up contributions are not subject to the exclusion limit. Thus, the $1,200 amount may generally be increased by the catch-up limit for the year. So, assuming no deductions or offsets to the $10,000 (unlikely if paid on a W-2) the catch-up limit ($4,000 for 2005) would allow an additional $4,000 to be contributed as an elective catch-up deferral.

Note: Elective contributions must give way employer contributions which must be uniform (integration aside).

[Bird]

I don't mind admitting when I'm wrong, and I think I blew this one. I was thinking that SEPs had the same 100% limitation as qualified plans, but it's 25%. Sorry.

(But Gary, the catch-up, if available, is $4,000, so the 2005 limit with catchup would be $5,200, right?!) [Yes, $5,200 is Correct. I changed (corrected) the $14,000 to $4,000 in prior post - gsl]

[Guest Roger K.]

Prior to 02, was this calculation different? I know the max % got increased to 25 but was the EE max contribution still determined using the formula Gary used before substituting 15% for 25%.

Also, for tax years beginning after 12/31/01, the EE's compensation will include elective deferral for purposes of calculating the deduction limit. Why was this rule added if the EE max calculation stayed the same? It would seem to me that the employee's compensation including elective deferral would be the employee'es gross compensation and the overall 25% limit calculated on this amount.

Do you have any resources with current examples of this calculation as I need to try and document my findings.

Thanks for assistance.

Roger K.

[Gary Lesser]

Roger,

The formula would be the similar for earlier years (but start off with "15" instead of "25"). The 25 percent exclusion limit (previously 15%) was not amended to use "gross" compensation (as the deduction limit was). No official reason has ever been given for this intentional "oversight." At the time, I brought the matter to the attention of Bill Sweetnam. It was determined to leave the exclusion limit basd on "includable" compensation.

The formula (among others) come from the SIMPLE, SEP, and SARSEP Answer Book, 11th Ed., Aspsen Publishers. See chapters 10 and 11.

[Guest Roger K.]

Gary,

Thanks for your help.

Roger K.