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Top heavy SEP contribution eligibility requirements


RTINSKY

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I have a single owner LLC that files as a sole proprietorship. The LLC has been in existence for 3 years. It purchased the assets of a going business 2 years ago. He had no employees prior to the purchase. If the qualifications are 3 out of the last 5 years, is the owner the only qualified person? If so is it top heavy? If it is top heavy, and he wants to contribute 25 % for himself, how much does he contribute for employees and do they have to meet the qualifications of a participant or is it for all employees that worked?

He does have 1 employee that came from the purchased company that is still with him.

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Assuming you have a model SEP, although top heavy rules apply, it isn't normally an issue simply because the contribution is the same percentage for everyone. So if the Key employee contributes 25% for himself, then he also contributes 25% for all ELIGIBLE employees. Determining who is eligible is normally where the errors occur, at least in my experience.

So, your eligibility is 3 out of the last 5 calendar years, PRIOR TO the calendar year for which a contribution is being made. So, when you say 3 years, do you mean 2014-16, or do you mean 2013-15, with 2016 being the year for which a contribution is being made?

So if he worked 2013-15, and the other employees only worked 2014-15, and he has three year eligibility, then the employees aren't eligible for 2016.

Hope this helps.

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It helps a lot. From you answer I deduce that if I am talking about making a contribution for 2015, then for him to be eligible, he needs to make the requirements 2 years, which would be 2013 and 2014. Is that correct? He wants to establish and contribute for 2015.

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Yes. I'm assuming he's on a tax extension...

And of course you can always make the eligibility LESS restrictive - the 3 year is just the most restrictive allowed.

It sounds, from what you are saying, like the employee has been there just as long, in which case the employee must be covered as well.

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Actually, the company was started in Oct 2013 and he did not buy the assets of the business until June, 2014. So, the employee didn't start working for him until June 2014. He didn't have any income in the business until he bought the company, but was active in pursuing business interests from Oct 2013 until he purchased the assets and started running the business. The time from Oct would count towards his qualifying time, would it not?

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Yup, so he has service in 2013 and 2014, so you'd use 2 year eligibility to allow him to contribute for 2015. And the employee didn't have service until 2014, so is ineligible for 2015 under 2 year eligibility.

One caveat - some might assert that since the owner had no income from the LLC in 2013, you can't use that 2013 service for eligibility. I don't agree with that stance (particularly for an owner - owners frequently perform service without receiving any compensation). But I bring it up for your consideration.

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