Non model SEP and Qualified Plan Adopted

[Dougsbpc]

We may or may not take over the administration of this small defined benefit pension plan.

I know this is somewhat common but do not know the solution. What happens when a company adopts and funds a non-model SEP on December 1, 2022 for the 2022 year and adopts a qualified Defined Benefit Pension Plan on January 15, 2023 effective for the 2022 year?

Does this work like if a SIMPLE IRA were adopted in the same year as a qualified plan. I think in that case there is an exclusive plan rule where the SIMPLE would be invalidated and distributed under VCP.

A non-model SEP and qualified plan cannot be maintained at the same time. Is the SEP or the qualified pension plan invalidated?

Thanks.

 

[CuseFan]

What is a non-model SEP, a provider's volume submitter/pre-approved document? It is the IRS model Form 5305-SEP that precludes maintaining any other plan. Does your non-model plan also preclude? That would be surprising. I do not know the ramifications if the DBP was impermissibly adopted retro to 2022.

[StephenD]

Hiya.   This is not like a SIMPLE. You can have a SEP and a DB Plan in the same year.  However, the SEP deduction is limited to 6% of comp.  The reason why I am commenting is I have been looking for a non-phototype SEP document, with a feature that allows you to also sponsor other plans simultaneously.  Can you please share where we can get one like this?  I can't seem to find one anywhere!

 

[cathyw]

Had this same problem last year.  A new client had a pre-existing IRS model SEP and wanted to adopt a DB plan.  We set up the DB plan and then scurried to find a non-IRS model SEP to restate by end of the year.  The only vendor we found that sponsored a non-IRS model SEP was Prudential.  The client set up the SEP account there, but wasn't too happy with Prudential's offerings.  We are planning on terminating the SEP this year and instead setting up a 401(k) profit sharing plan.  Much more flexibility, especially coupled with a PBGC covered DB plan. 

[Dougsbpc]

Apologies

The SEP is not a non-model SEP it is a 5305 model SEP.

 

[StephenD]

So it is still not too late to adopt a different SEP prototype for 2022, effective 1/1/22.  You just need to find one.  Cathyw thinks Pro has one.  If you find another, please let us know!

 

[CuseFan]

I know people like the simplicity of a SEP but in a combo arrangement using a PS 401(k) is a much better option and worth the added cost. Unless the DB is PBGC-covered, DC (SEP or PS) is limited to 6% of eligible payroll as noted above - so $18k-$19k on max pay, but a 401(k) provision adds another $22k-$30k that is not available with a SEP. If the person does 402(g) max elsewhere (other employment) then a SEP makes sense.

Looks like Schwab has one. https://www.schwab.com/resource/schwab-sep-ira-basic-plan-document 

I still don't know the ramifications of impermissibly adopting another plan when maintaining SEP on 5305, not to mention any combined plan deduction issues if they funded 2022 SEP to the max rather than limit to 6%.