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"Terminated" SEP and top heavy aggregation


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Fairly typical scenario - employer sponsors a SEP for, say, 2015, then decides to change to a 401(k) for 2016. No problem there.

When calculating top heavy, a SEP is included. My question involves determining when the SEP is "terminated" so that SEP balances no longer have to be included in the top-heavy determination.

According to the IRS website re terminating a SEP:

"To terminate a SEP, notify the SEP-IRA financial institution that you will no longer be contributing and that you want to terminate the contract or agreement. It is a good idea to notify your employees that you have discontinued the plan.

You do not need to give any notice to the IRS that you have terminated the SEP."

This brings up a couple of issues. First, assuming such notice is given, it seems that this would be considered a "plan termination distribution" - even though no actual "distribution" takes place, so you would have the 5-year addback.

Agree/disagree?

If no such notice is given, which I suspect is often the case (the employer simply stops making contributions to the SEP) it may not technically be "terminated" - but it also seems unreasonable to not consider it terminated. It still seems to me that it would be reasonable to use the 5-year addback and just consider it "terminated."

Agree/disagree?

There seems to be a lack of specific guidance here, so it seems like you have to determine what is reasonable and give it your best shot.

I appreciate any and all thoughts.

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You're right. There is a hole in the process. One thing that the IRS has allowed in the Top Heavy determination process is for you to use contributions to the SEP instead of account balances. This was apparently an attempt at pragmatism when considering what an employer must go through to obtain a balance from an account they do not control (beyond actually depositing the contribution to it).

It would've been a perfect process had the IRS merely made the Regulation read "Contribution made to the SEP during the past 5 years for those individuals included in the Top Heavy Test". This would effectively treat each SEP contribution made as if it had been immediately withdrawn by the participant (regardless of whether or not that was the case). That would make it more easily determinable (as each SEP contribution would be treated similar to an immediate in-service distribution and tracked for the 5 years).

As it stands now, you're left struggling with a bunch of unreasonable approaches; and I feel your pain :-)

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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