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What is compensation for purposes of SEP using Form 5305A-SEP


Gudgergirl
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Client has SARSEP and allows employees to defer up to 25% of compensation and client makes annual employer contributions = 4% of compensation.

Client has been determining all contributions based on gross wages.

Client uses model IRS Form 5305A-SEP which to me seems to say the term "compensation" is w-2 wages excluding employer contributions and elective deferrals.

Which means that for purposes of calculating employer contributions means that the 4% should be applied to the employee's wages less elective deferrals.

Anyone have any thoughts?

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  • 1 month later...

SEP contributions should be made according to the SEP agreement (not the SARSEP agreement). It should be noted that compensation for top-heavy purposes must use unreduced compensation regardless of which document is being used.

Consider using a prototype SEP/SARSEP plan document that generally gives the user an option.

See, too, Publication 560, page 4, "Compensation."

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