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Solo 401k Business Owner owns 100% of his business and has no employees. He's been maxing out his SEP for years. Now, he acquires the assets of another business and as part of the transaction agrees to sponsor their 401k Plan.

I am resigned to the fact that 414a requires that the new owner must recognize all service with the acquired business because it adopted their plan. Based on the wording in 414a that requirement is not limited to just the acquired plan, and also clearly applies to SEPs.

So the question is, are there any 410b6c like provisions in a SEP that would allow me to exclude ALL of the acquired employees for a period of time?

Assume they used the max 3 year eligibility period.

Austin Powers, CPA, QPA, ERPA

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  • 2 months later...

Hi Austin, sorry this never got a response. No such rules. The Code does not provide for such exclusion in the case of a SEP. Also, the Listing of Required Modifications and Information Package (LRMs) do not contain any language that would allow such rules to apply to a SEP.

Hopefully the SEP is (or amended to be) a prototype plan for the year in which the 401(k) plan was maintained.

For deduction purposes, the SEP contributions reduce the otherwise allowable P/S-401(k) deduction limit. Probably best to fund SEP first for all eligible employees, then contribute to 401(k). Even though the SEP was fully funded (assume 25%), there may be a tiny amount of wiggle room since the 25% deduction limit under the 401(k) is based on aggregate compensation of all participants. Perhaps only catch-up contributions can be made in the 401(k) if SEP fully funded.

Hope this helps.


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