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Requiring Employees to Establish SEP at xx institution


Guest kprhok
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Guest kprhok

Can an employer who maintains a P/Sharing Plan terminate the P/S plan and transfer funds to a SEP established for each participant at xx financial institution with e/r continuing to make future contributions to their SEP accounts, or do the rules require the P/Sharing plan participants to receive a distribution from the terminated plan, giving them the option to open a SEP (or simply move to an IRA) wherever they wish?

Related question re future contributions of employer to new SEP:

For future contributions to the SEP that the employer may establish at xx institution, can the SEP arrangement be limited to that institution, or does the employee always have the freedom to establish their own SEP wherever they wish and require the employer to send the contribution to the institution they have selected to hold their SEP?

Thank you.

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The more technical term for what you have referred to as a "SEP" is a "SEP-IRA", I think. Essentially, once monies have been deposited into an account established by the SEP sponsor on behalf of a participant, that participant has an IRA. A personal IRA. Hence, the participant can manipulate that IRA the same way they could manipulate any other IRA they have. They can make withdrawals. They can transfer monies to an alternate IRA, etc., etc. Of course, any movement of the funds would be subject to whatever rules are in place at the IRA, so the participant could be charged an early termination fee or market value adjustment if the investments in the IRA called for same.

But the basic answer to your question is that once the account is established and funded, the sponsor no longer has any control over the disposition of the assets. The account is a personal IRA account of the participant.

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With the above said, the specific answers to your specific questions are:

1) I don't believe that a plan sponsor can force the disposition of assets from a terminated plan to be transferred to an IRA (such as what would be associated with a SEP-IRA) without participant approval.

2) The plan sponsor can establish the SEP-IRA accounts at the institution of the plan sponsor's choosing. The participant cannot force the plan sponsor to deposit funds in an IRA of their own choosing.

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Guest kprhok

To be sure I understand point 2 of your post, after the deposit is made by the employer to a SEP-IRA account at an institution of the employer's choosing, the employee could simply move it to an institution of his/her choosing but the initial deposit could be under the control of the employer.

Thank you for your replies. I have not been able to find anything on this elsewhere.

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The Conference Committee report on the 1978 Revenue Act which established SEPs notes that after the contributions are made, the SEP is subject to all rules for IRAs.

The disposition of assets from a qualfied plan would not allow the transfer of plan assets to an IRA without the employees consent b/c the employee must establish an IRA.

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kprhok, you have it right. Keep in mind that if the employer's choice of SEP-IRA involves an investment which is specific to the institution, while it theoretically can be moved, the intended recipient IRA may not want to accept it. Similarly, if the employer's choice of SEP-IRA investment has any sort of built-in discouragement, such as a requirement to leave the funds in the institution for a certain period of time or else the investment suffers what may be called a "market value adjustment" or "deferred sales charge" then the movement of the funds may involve a significant decison on the part of the participant.

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To add...

If the SEP is a 5305-SEP, then the Participant is usually permitted to establish their SEP-IRA at any financial institution. The financial institution often requires a copy of the 5305-SEP form that was completed by the Employer, so that they can flag the IRA as a SEP-IRA.

If the SEP is a Prototype SEP, it may include restrictions to the effect that all participant’s under the SEP must establish and maintain their SEP IRAs with the Prototype sponsor. This does not preclude the participant from transferring the balance to another IRA after the contributions have been made to the account.

Even if there are no noted restrictions in the Prototype SEP Form to prevent the participant from establishing their SEP-IRA elsewhere, some financial institutions are unwilling to establish a SEP under another sponsor’s prototype , because of limitations or requirements that may be included- and to which they do not want to be subjected. For instance, a prototype-SEP may require the financial institution to calculate earnings on excess contributions. Not all financial institutions provide such calculations

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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