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What is necessary to terminate a SEP?


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  • 2 weeks later...

Unlike qualified plans, the termination of a SEP IRA is very simple. The employer should notify the participants that the SEP is being terminated- preferrably in writing. No other action is required.

Participants have the option to keep their assets in the SEP IRA, even after the plan is terminated.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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I'm not even sure that notice to employees is required -- but that certainly seems prudent from an employee relations standpoint.

The reason for this informality is that a "simplifed employee pension" or "SEP" technically (in the terms of the Internal Revenue Code) is just an individual retirement account that receives contributions pursuant to rules set forth in a written program (called a "SEP arrangement" in the Code), such that the employer's contributions to an employee's IRA are not considered to be compensation-type income to the IRA owner (the employee) and don't count against the usual $2,000-per-year limit on IRA contributions made by the IRA owner.

Some institutions call such an IRA a "SEP-IRA," to earmark it for their internal purposes as being an IRA into which more than $2,000 a year can be deposited (the employer contributions) without having the accounting computer throw a fit. But employer contributions pursuant to a "SEP arrangement" that meets the Code's definition of a SEP arrangement can be made to any old IRA the employee already has established (other than a Roth IRA), and that IRA becomes a "SEP" for purposes of the employer's contribution.

So, assuming the written "SEP arrangement" met the Code's rules when the employer's contributions were made to the employees' IRAs, those contributions are safely tucked away in the employes' IRAs and there's no tax-exempt trust fund to blow up later (as with a tax-qualified retirement plan under Code section 401 that becomes disqualified because its terms fall out of compliance with changes in the tax laws). Basically the employer just walks away from any future funding under the SEP arrangement.

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  • 2 weeks later...

What if the employer is not happy with the investment firm that set up the SEP? If he wants to set up a SEP with a different investment firm is a trustee to trustee transfet possible?? Can the existing SEP assets be rolled into the new SEP account??

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As a legal matter, there's no transfer of funds required in order for the employer to begin using a different investment firm for future contributions -- the already-contributed funds can stay in the employees' current IRAs.

But if the new investment firm doesn't want the employer to contribute funds to the employees' IRAs for which the former investment firm is acting as IRA trustee or IRA custodian, then the new investment firm can set up new IRAs for the employees. An individual can own more than one IRA.

Then the individual employees can direct the old investment firm to move their funds into the new IRA at the new investment firm, as a direct transfer (no withholding or other income tax aspects). I think each employee would need to provide that direction to the old investment firm (the employer probably wouldn't have the authority to do so).

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dmb,

It is really up to the participant. As stated earlier, 'SEP' is just a way of tagging the IRA to indicate that SEP contributions are being made to the IRA. The fact that it is tagged 'SEP', does not change the fact that it is just an IRA.

I hope this helps

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Not necessarily-

Take at look at the results of this survey, published by The Investment Company Institute (ICI).

http://www.ici.org/retirement/99_state_ira...a_bnkrptcy.html

In all cases, traditional IRAs and SEP IRAs are offered ( or not offered)the same level of protection,

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Cool! Thanks for adding the link!

There was a case out of Florida -- a friend of mine handled it -- in which he was able to argue that because the IRA had SEP contributions it had a different status than an IRA into which employer contributions never had been made, but I think it was reversed on appeal.

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