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How does the 15% deduction limit affect a SARSEP?


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How does the 15% limitation affect a SARSEP? My reference material states that the 404 deduction limit applies to SEPs on an individual basis rather than on an aggregate basis as in a profit sharing plan. I have a SARSEP in which a participant deferred 15% and the employer SEP contribution is 4.5%. In aggregate the 404 15% limit is fine. What are the consequences to this participant?

DMH

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I found an example in BNA to show that the 15% is calculated on an individual basis, and after subtracting SARSEP contributions. I assume this still stands even after the 415 limit changes because when I reveiw 415©(3) it includes deferrals, but only 402(g), 125 and 457, so it looks like SARSEPs are still excluded when determining the comp to use. This client has a 6/30/00 year end for the SARSEP. Which year will the excess be taxable? 2000? or 1999?

DMH

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OK, here are my final questions after researching.

1) I have excess ADP amounts for a SARSEP year ended 06/30/00. We must notify paricipants no later than 8/15/00 to avoid the 10% excise. Are these includible in their income for 1999 since this is the earliest that these amounts could have been deferred?

2) I also have an individual that exceeds the 15% of compensation limit based on plan year end 06/30/00. Is this limit applied based on plan year or on calendar year? (the IRA Answer Book refers to the calendar year, but I don't see that in the 402(h) section) Since both the employer contributions and the SARSEP contributions contribute to the excess, which year are the amounts includibe? The total excess is $2,000, of which $1,500 is employer contribution. The employer contributions are not allocated until 6/30/00, , so is the excess income for 2000? But of the portion that is employee money, part of it was deferred in 1999, so it is includible for 1999? If the employer contribution is not deposited until 8/15/00 can we just calculate earnings from 8/15/00 until the date of withdrawal?

Any comments appreciated.

[This message has been edited by Dawn Hafner (edited 06-26-2000).]

DMH

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  • 3 weeks later...

I am not an expert in this area, but I have had some exposure to the issue. In the standard "model 5305" type SEP and SARSEP documents that are provided by banks, insurance companies, brokerage firms, etc. I believe that the 15% limit applies on an individual basis.

Several years ago, our firm had an individually designed SEP document that we would use in the case of a plan sponsor that had previously sponsered a DB plan. (Since you are prohibited from using a model SEP in that case).

It seems that as long as you stayed within the 404, and 415 guidelines, you could write a custom SEP or SARSEP that would allow you to exceed 15% on an individual basis and get the full 25%.

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  • 1 month later...

See my responses:

1) I have excess ADP amounts for a SARSEP year ended 06/30/00. We must notify paricipants no later than 8/15/00 to avoid the 10% excise. Are these includible in their income for 1999 since this is the earliest that these amounts could have been deferred?

IMO, the amounts are treated as wages for the C.Y. year in which the plan year ends (when the ADP is determined), to wit, 2000.

2) I also have an individual that exceeds the 15% of compensation limit based on plan year end 06/30/00.

EMPLOYER DEDUCTIONS. The computation period for determining the employer's deduction under Code Section 404 is: (but see employee inclusion later)

• The amount that may be deducted by the employer for any calendar plan year may not exceed 15 percent of the includible taxable compensation paid to eligible employees during the calendar year.

• If the employer's taxable year is not the calendar year, then for deduction purposes, compensation paid to eligible employees during the calendar year ending within in the employer's taxable year is used. [iRC § 404(h)(1)©; see (h)(1)(A) for the timing of the employer's deduction]

EXCLUSION BY EMPLOYEE — IRC § 402(h):

Contributions by employers are excluded from the gross income of an employee to the extent that the contribution does not exceed the lesser of:

♦ 15 percent of includible taxable compensation without regard to the SEP contribution, or

♦ Up to $30,000 (as adjusted, see example 2 if integrated) per participant.

The computation period for determining how much of a SEP contribution may be excluded from income appears to be the 415 limitation year under Code Section 402(h). [see IRC 415(j) and Reg Section 1.415-2(B)] Unless an election is made, the limitation year is the CY. Most employers elect to use the PY as the limitation year.

Hope this helps. Gary

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