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Good morning

Would like to check/confirm the following:

Client wants to start a DB plan for 2019. Informs me that put away 20k in a SEP already. This is already in excess of 6% projected 2019 salary (non-PBGC - one lifer)

Under deductions rules, 31% application, max 2019 deduction is 50k (based on current comp - will not increase). SEP was 20k and DB deduction cannot exceed 30k. if opnly SEP, max deduction is approx. 40k.

Q1: Cannot take back the SEP, correct? If not, how can it be done?

Q2: If a DB plan required 100k of contribution and only 30k is deductible for 2019 (as per above), assuming that there will be room for 2020, can the remaining 70k deduction be applied towards 2020, in addition to the 2020 100k DB deduction i.e. 2020 total deduction can be 170k? Or, DB plan design for 2019 should have no more than 30k of required contribution? Client wants 100k each year and start in 2019.

Thank you for your comments.

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Q1 - cannot undo SEP as far as I'm aware. Also remember you cannot have another (qualified) plan if using the IRS model Form 5305A-SEP.

Q2 - yes, you could deduct $30K DB in 2019, and then $170K in 2020 if room for such under the rules. Be sure not to physically contribute more than $30K to DB during calendar 2019 and be sure that the 2019 total MRC is deposited by 9/15/2020. The $70K deposited between 1/1-9/15/2020 should be clearly labeled required contribution for 2019 deducted in 2020.

Any SEP contribution must not exceed 6% of eligible pay in 2020, and if you're not sure what pay will be it's best just to stop funding the SEP or wait until after year end.

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If the SEP was drafted using the SEP-5305, are they even allowed to have the DB for 2019? I thought the SEP would have exclusive plan rules.

 

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This is not a SARSEP (5305-A-SEP -I agree no qualified plan can co-exist) nor a traditional IRA (5305-AI do not see where a qualified plan cannot exist), just a SEP account that is subject to 25% deduction rules.

I must admit, I do not see (possibly missing) where it says you cannot have SEP and a DB plan together. Could you please point out? As far as I knew, as long as the deduction limits are calculated properly, no issue. I have not had one of these in many years, so possibly overlooking something.

Regards

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See top of the middle column, page 1 of Form 5305

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