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SEP IRA contributions for owner, but not employees?


Guest hb95
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Owner of S-Corporation that is only two years old wants to set up a SEP IRA and make contributions for himself, but not his employees. The owner argues that this is possible because the employees have not yet been employed for 3 of the last 5 years. Then, after the owner makes these contributions to the SEP IRA only for himself for as many years as he can, he wants to transition the SEP IRA to a Simple IRA and continue to make contributions for only himself. Is this permissible? Is there any IRS guidance on this?

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If the corp is 2-yrs old are you saying the owner been employed for 3 of the last 5 years but the common law employees have not?

All employees who received at least $5,000 in compensation during any 2 preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, are eligible to participate in the SIMPLE IRA plan for the calendar year.

PensionPro, CPC, TGPC

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Happens all the time. The SEP rules are in 408 and right on the 5305-SEP form itself, but they are either not read or ignored. IRA custodians such as fund companies, brokerage firms, etc. don't "administer" SEPs, they simply hold the IRA accounts, it is up to the employer to administer the plan, and they are frequently administered just as this owner suggests.

I know IRS knows about it, I've told them myself. but these things fly beneath their radar. They'd rather beat up an employer who forgot to sign a minor interim amendment to a 401(k) that had no impact on plan coverage or contributions, rather than track down the rampant abuse in the SEP world that results in a federal tax expenditure for the owner's contribution and no retirement benefits at all to other employees.

<rant/off>

I carry stuff uphill for others who get all the glory.

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HI. Have you guys heard that SEP's and SIMPLE Plans are now being audited...... and some of these owners are getting hit really hard. There is no statute of limitations on these plans. I have worked on fixing one SEP and one SIMPLE IRA..... and the fixes the IRS was imposing were expensive.

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