SEP IRA and 401(k) Plan

[Guest MTransue]

I have a client who is 100% owner in Company A and sponsors a 401(k) Plan on a calendar year. The plan struggles to pass the ADP test each year, and refunds are a possibility each year.

The same person has 50% ownership in Company B, with his partner. There are no employees in Company B.

There is no control group, nor affiliated service group with Company A & B. Neither company has union employees.

In 2012, the owners has made deferral contributions in Company A plan already. The owner and his partner would like to start a SEP IRA in 2012 for them. Can the owner in Company A & B, participate in both the 401(k) plan with Company A, and the SEP IRA with Company B.

I do not think he is permitted to do so, but cannot site sources that confirm. The accountants are not agreeing with my answer, and I need to "show" them that participation in a 401(k) and SEP IRA in the same plan year are not permitted.

Thanks in advance for any help!

[ETA Consulting LLC]

In order to answer the question, you must ascertain if the companies are "related" under the controlled group, ASG, or Management group rules. If you are saying that these companies are not related, then each plan has it's seperate 415 limit; so they could do it.

Say again: IF YOU ARE SURE THE TWO COMPANIES ARE NOT RELATED, then you are saying that they could maximize the 401(k) sponsored by one and the SEP IRA sponsored by the other.

Good Luck!

[PensionPro]

Also remember that for 415 purposes the "at least 80%" common ownership requirement is replaced by "more than 50%."

[Belgarath]

But remember this about PP's point - this is ONLY for parent-subsidiary groups.

[Guest MTransue]

Yes, I am sure they are not related. There is no Parent- Subsid, no Bro-Sis, and neither company is a service company, so no A-Org, B-Org.

The person is 100% owner of Company A; and 50% owner, with another 50% owner in Company B.

What are the 415 limits for SEP IRA, if the owner is deferring $17K and receiving $2K match in the 4k plan? I'm not familiar with SEPs....

Thanks for the help!

[Bird]

What are the 415 limits for SEP IRA, if the owner is deferring $17K and receiving $2K match in the 4k plan? I'm not familiar with SEPs....

100%/$49,000 (25% deduction limit for the company). If, as you say, there are no controlled group/ASG issues, the contributions to the 401k plan are irrelevant. Basically, there is a 415 limit for each employer (but note that each taxpayer gets only one 402(g) limit of $17,000; they couldn't double up on 401(k) contributions).

[Guest MTransue]

So for 2012, the limit in the 4k would be $50K.

For the SEP IRA, the limit is the same, $50K. Can the owner put in $50K, if he maxes the $17K in the 4k plan, or does that reduce it to $33K in the SEP IRA? Since the company with the SEP IRA is a partnership with K-1s, is the deductibility limit 20% and not 25%?

[Bird]

So for 2012, the limit in the 4k would be $50K.

Yes, I was stuck in 2011.

For the SEP IRA, the limit is the same, $50K.

Yes.

Can the owner put in $50K, if he maxes the $17K in the 4k plan, or does that reduce it to $33K in the SEP IRA?

$50K

If, as you say, there are no controlled group/ASG issues, the contributions to the 401k plan are irrelevant.

Since the company with the SEP IRA is a partnership with K-1s, is the deductibility limit 20% and not 25%?

Well, the deductibility limit is 25%, but 20% is a shorthand approximation of the max based on SEI minus the appropriate SEI tax deduction.