Invalidate SEP IRA and New DB Plan for 2021

[Ananda]

My client has a SEP IRA that received contributions for 2021. However, the client wants to set up a DB Plan by year end 2021. Does setting up a DB Plan automatically invalidate the SEP IRA resulting in "excess contributions" for the SEP per 408(d)(4), and thus a tax free distribution to participants if made before tax return is filed in 2022?

[John Feldt ERPA CPC QPA]

No. The SEP does not behave like a SIMPLE in this regard. 

[Ananda]

OK Thank-you. I found the SIMPLE provision in the Code but no such provision exists for SEP'S. So if an employer has a SEP plan is there a prohibition for it to set up a qualified plan in the same year or does this only apply to SIMPLE plans which would become invalid if a qualified plan is established?   

[CuseFan]

If SEP is on IRS model document Form 5305-SEP, that precludes the sponsor from having another plan. If SEP document is on a pre-approved volume submitter/prototype document then you can have another plan. The SEP is treated as a DC plan. If more than 6% of compensation has already been funded for 2021 then you have a combined plan deduction limit of 31% of compensation, which likely severely limits the DB deduction - unless they can somehow finagle a return of 2021 SEP contributions.