Top-Heavy SEPs

[Guest derek]

I am looking at Q 8:19 of the Simple, SEP and SARSEP Answer Book by Panel Publishing and have a question. If a SEP is top-heavy, and the employer usually makes contributions of 15% of pay, can they just treat 3% of the contribution as a top-heavy minimum (made for all employees) and thus not have to make any additional contributions? Q-19 indicates that the minimum required top-heavy contribution may be made to all employees (assuming no other limits are exceeded).

[Guest Paul McDonald]

A SEP plan (using the IRS Form) is deemed to be top-heavy. The minimum is the lesser of 3% or the highest percentage received by a Key Employee. If the employer contributes 15% for all eligible employees, top heavy is satisfied in the process. If only 2% is contributed to all eligible employees (which includes the key employees), top heavy minimums are also satisfied. It isn't to be a 15% + 3%. That would exceed the maximum deductable amount.

If you are using a prototype SEP and use permitted disparity (integration with SS) you have a several part formula to go through to first satisfy top heavy minumums and then allocate the remainder of the contribution.

Top heavy minimums are more of a problem in a SARSEP as the plan is generally a deferral program only. If a key employee makes SARSEP deferrals of 3% or more and the plan is either deemed or is calculated to be top heavy, then the employer is required to make an additional contribution to all of the non-keys. The key employees deferral is treated as an employer contribution which then triggers the minimum contribution requirement of the top heavy rules.

If a SARSEP is top-heavy, most plans that I have dealt with also adopted a SEP and gave 3% to everyone to start with under the SEP and then ran the deferral part of the SARSEP limiting the maximum addition to 15%. Others would have the keys stop making deferrals to avoid the top-heavy minimums when averse to making employer contributions.

[Guest derek]

thanks for your response!!

[Lynn Campbell]

In a SARSEP, or in a SEP, if top heavy, does the key EE get the 3% top heavy contribution along with all the non keys? This would seem desirable but is it permitted?

[Guest Paul McDonald]

The SEP plan generally doesn't have the problem as all of the contribution is made by the employer and all eligible employees are to get the same percent or if integrated you follow the multi-step formula to satisfy the minimum first to everyone.

With the SARSEP, generally the Key employee would not receive an additional minimum contribution. To provide the additional amount from the employer to the Key employee all you have to do is make a SEP contribution from the employer to all employees and have the balance (up to the limits) be deferrals.

If using the IRS forms you would need both a SEP and SARSEP form to do this. If under a prototype, the election could be made to allow for both deferrals (employee) and SEP (employer) contributions.