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SEP and 401k in same year (husband & wife)


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Facts:

Husband and wife each own 100% of separate companies (have a child under 21 so they are related). His is a Sch C, hers is an S-Corp.

The husband current contributes to a SEP based on his Sch C income (the max 20%). The wife set up a 401k PS Plan through her S-corp and contributes the max to it.

Issue:

Are you allowed to have SEP and 401k in same year? If you are not allowed to have both, we thought we would just have the husband contribute to the wife's 401k plan since they are related and figured he could get the same 20% in the 401k PS Plan.

 

Any issues with the above?

Thanks in advance for your help.

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You are allowed to have both, but the SEP does not have the flexibility to exclude the separate company in the manner in which a 401(k) plan may.  All the 401(k) plan has to do is pass 410(b).  A SEP doesn't have such tests because there is no flexibility within the setup to allow for the exclusion from participation.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Is this the IRS model SEP form, or a prototype SEP? I'm not certain if a prototype SEP document may be able to have such an exclusion? You definitely can't with the IRS model SEP, as ETA has mentioned, and you may not be able to with a prototype SEP - I just don't know about the prototype. If you have a prototype, check the document to see.

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The SEP document must be a prototype if the employer is currently maintaining a qualified plan. There can be no exclusion of a controlled group member under a SEP arrangement.  All employees (including owners) must participate in the SEP. 

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