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Changing SARSEP administrator/financial institution.


Guest Scott L Brown
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Guest Scott L Brown

My company continues to maintain a SARSEP benefit plan and are very generous with their contributions. However, the financial institution that originally set up the plan has limited choices in investments. I am preparing a proposal to change from the financial institution to a financial planner. The IRS has said that the company can continue to operate the SARSEP if they "appoint a new trustee [and] continue to use the old plan". My question is how does my company appoint a new trustee. In addition, can the plan be administered in house? Both questions assume that answers do not violate the IRS regulations regarding the continued operation of the SARSEP plan. Thank you in advance.

[This message has been edited by Scott L Brown (edited 07-06-99).]

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Guest Paul McDonald

You will need to read the SARSEP document to see if it sheds any light on steps to take. Some documents have language regarding changing IRA "Custodian". Additionally, some documents disclose to participants that they are allowed to have an IRA (SEP) of their own choosing.

SARSEPs are funded by IRAs and you are allowed to rollover from one IRA to another as a personal ownership choice or do a direct transfer from one IRA to another.

Your first statement however bothers me when you say that the company is very generous with their contributions. Is the company matching your contributions by any chance?

SARSEPS are generally employEE deferral programs only. The only required EmployER contribution is when the plan is TOP-Heavy and the maximum TH contrib is 3%.

The only other possibility is that there is also a SEP plan where the Employer contributes up to 15% of compensation (not matching). However, the maximum from both the employee and the employer is limited to 15% of your POST-deferral compensation.

You want to self administer? I fear by your initial statement that the plan may already have been administered incorrectly.

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Guest Scott L Brown

Thanks for the direction. You are correct: My company has SARSEP (salary reduction) and a SEP, the combined total of which cannot exceed 15%. The reason I made the comment of the generosity of the company is because they contribute 7% to the SEP regardless of my contributions to my SARSEP (although they do ask that I contribute 3%, which I do).

Yesterday I was talking to one of the senior engineers here and he said that I can roll my SEP IRA over to another IRA of my choosing, with no restrictions on the choice of the family of funds. Does this sound correct? The major reason I am pursuing the information for changing administrator's is because the fund family that holds the "default" accounts is a real dog and they charge 5% front load. With all of the no-load funds available, I think we (myself and fellow employees) can be better off using a financial planner or having a self-administrated plan. What do think? Is it worth the effort if I can roll my IRA's to another family?

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Guest Paul McDonald

Your Senior Engineer is correct. A SEP IRA is still an IRA and comes under the rules for IRAs. The SEP distinction is that an Employer is also allowed to contribute to it in excess of the normal $2,000 limit.

With an IRA, the IRA owner is permitted to transfer, tax free, assets from other retirement programs (including IRAs) to an IRA. The rules permit transfers from one trustee to another, rollovers, and transfers incident to a divorce.

Under the transfer from one IRA trustee to another is not, by definition, a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the one-year waiting period that is required between "rollovers".

A rollover involves a distribution directly to you which if rolled over into another IRA within 60-days is tax free. If you fail to accomplish the rollover within the time limit, the distribution must be treated as a taxable distribution. As mentioned above, if you do a "rollover" (as opposed to a T to T transfer) there is a one year restriction before you can do another "rollover" from the same IRA.

Since we are not talking about a divorce, we'll let the other transfer option pass.

The next issue is the "default" account. It sounds like the SEP/SARSEP documents controlling these plans calls for a specific IRA custodian. Here you will have to examine the specific plan provisions in this regard. It could be that the contributions would have to be deposited with the "custodian" and you would have to request that the custodian transfer the assets to the IRA of your choosing. Hopefully you have available a "money market" type option without a front end load that you could elect for the contributions to be deposited temporarily and then transfered to your other IRA.

Another possibility is that the SEP/SARSEP document is what I would call an "open" document that says that employee deferrals and employer contributions will be paid to the employee's IRA trustee, custodian, or insurance company (for an annuity contract), or if necessary, an IRA established for an employee by the employer. This is the language from the IRS Model FORM 5305A-SEP which allows for employees to choose their IRA from a source of their own choosing. The employer would be faced with having to send deposits to numerous financial institutions if every employee chose a different institution.

This may involve you having discussions with your employer regarding the possible impact on administrative costs of having payroll deductions sent to numerous institutions, etc. It may well be worth your effort to pursue this further. Your employer can always amend the plan if it proves out that the current documents and investment choices are no longer satisfying employer and employee objectives for maintaining the SEP/SARSEP program.

If other employees are feeling the same way, hopefully your employer is amenable to giving the plan a thorough review to match the plan with company and employee objectives.

Good luck!

[This message has been edited by Paul McDonald (edited 07-09-99).]

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Guest Scott L Brown

Thanks again Paul. You hit the nail on the head when you said, "The employer would be faced with having to send deposits to numerous financial institutions if every employee chose a different institution." In my discussion with the senior engineer, he said that at one time, the employees were able to place their deductions in an IRA of their choosing. I guess everyone had their own choice and the employer got overwhelmed by it after a while. I think I'll stick with rolling my SEP over to another family and wait until I have sufficient funds in my SARSEP and do the same.

Thanks again.

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