Combining 403b with Keogh/SEP for Self-employed

[Guest Fishchick]

If a self-employed person wants to establish a SEP-IRA or MP/PS plan but is also a participant in a 403b through an employer (for example, a professor receives self-employed income for giving speeches or writing books). Is the overall $35,000 limit in place, or could the person max out both the 403b deferral and the SEP/ Keogh contribution?

For example, defer $10,500 to the 403b and contribute $25,500 to the SEP (total $36k)

Or defer $10,500 to the 403b and contribute $35,000 to the MP/PS plans (total $45,500).

If anyone has a good reference on this issue, I would be very interested. I only have a very old article called "Beware the 403(B)-Keogh Pitfall" by Mary Rowland. It's from at least 1995, and I don't know if there is any impact on this with legislation since then.

[Guest Yanikoski]

I don't have a good reference for you, but (despite some early uncertainty over the matter) the consensus now appears to be that the new tax law does NOT change the aggregation rules for defined contribution plans. Under Section 415, 403(B) plan contributions therefore still need to be aggregated with those of any plan the participant controls, such as a SEP provided through self-employment. BOTH the dollar limit and the percentage limits must be met. For 2001, that means the combined contributions cannot exceed $35,000 as you suggest, but it also means that they cannot exceed 25% of combined includible compensation. Also, the 403(B) cannot exceed 25% of income from that employer -- so you can't use aggregation with self-employment to INCREASE the 415 limit for a 403(B) plan. For 2002 these limits increase to $40,000 or 100% of compensation, so the percentage limit becomes irrelevant for most people.

[Guest Brent Rowell]

Carol please help. I have forgotten the rule

403(B) + Keogh or 403(B) and second employer is fairly common.

(I'm thinking of University Professors)

What I remember is that it did work assuming the 403(B) employer had elections available.

I think the method was to make election C and aggregate by employer and not by employee

:confused:

[Belgarath]

The general rule is that the 403(B) is separate - not aggregated. However, take a look at 1.415-8(d)(2), which lists two exceptions, one of which is the situation you describe. Since he owns the sole propretorship, they are aggregated. I agree with Yanikoski that this aggregation isn't changed by EGTRRA.

[Carol V. Calhoun]

EGTRRA adds new Code section 415(k)(4), which confirms the continued existence of the rule in section 415(e) before its repeal: that a 403(B) plan is combined with a Keogh or other qualified plan of an employer controlled by the participant, but not by a qualified plan of the employer that sponsors the 403(B) plan, in applying the 415© limits. For pre-EGTRRA periods, there is an exception if a participant makes a C election. However, the C election will no longer exist beginning in 2002, since the maximum exclusion allowance is being repealed. Thus, a 403(B) plan will never be combined with a qualified plan of the employer which sponsors the 403(B) plan.

[Belgarath]

Carol - thanks for the response. Forgive my being obtuse, but I want to make sure you're saying what I think you are saying. Are you saying that they are still aggregated in the situation where the separate employer is the participant (as in the case of a self employed), or are you saying that they will not be aggregated even in this circumstance? I believe you are saying the former.

I need another cup of coffee before I start thinking too hard. Thanks!

[Carol V. Calhoun]

The former is correct. Maybe I need to get another cup of coffee before I start writing too hard?

[Guest Brent Rowell]

Sorry, too dumb to really understand what Carol said

Generic Sample Case:

Physican works for University (Clearly no control)

Physican works for VA (No comment necessary)

Physican works for "Other" (may or may not be not for profit)

Physican has Schedule C income (Private practice, and or fees for expert wittness)

Other than "elective contribution", what aggregation rules apply for 2002?

Same sort of thing probably exists for engineers, etc. with other jobs probably being for-profits.

[Carol V. Calhoun]

Okay, to recap:

• Physican works for University (clearly no control).
  
• Physican works for VA (again, clearly no control).
  
• Physican works for "Other" (may or may not be not for profit, and you do not specify who controls it).
  
• Physican has Schedule C income (from unincorporated 100%-owned private practice, and/or expert witness fees).
  

Further assume that the University has both a 401(a) plan and a qualified plan; that each of the University, the VA, the physician's unincorporated business, and "Other" has a qualified plan; and that there is no relationship between the University and the VA. For purposes of applying the limit of 415© in the year 2002 (i.e., the lesser of $40,000 or 100% of compensation), the following plans would be combined:

• The University's 401(a) plan would not be combined with the 403(B), no matter what, because the physician is not in control of the university, and the 403(B) is always treated as a plan of an entity over which the physician has control.
  
• The VA's qualified plan would not be combined with either of the University's plans, or with the physician's Keogh plan, because there is no common control between the VA and either the University or the physician.
  
• The qualified (Keogh) plan the physician sets up based on his or her Schedule C income will be combined with the University's 403(B) plan, because the Keogh plan is maintained by a business over which the physician has complete control.
  
• The qualified plan maintained by "Other" will be combined with the University's 403(B) plan and with the Keogh plan only if the physician has control or is considered under 414 to have control over "Other" (e.g., if "Other" is an incorporated business, and the physician is a 50% shareholder of "Other").
  
• The qualified plan maintained by "Other" will be combined with the University's qualified plan only if "Other" is part of the same controlled group as the University (e.g., if "Other" is a taxable research subsidiary of the University, or a tax-exempt organization with the same Board of Directors as the University).
  
• The qualified plan maintained by "Other" will be combined with the VA's qualified plan only if "Other" is part of the same controlled group as the VA (e.g., if "Other" is an instrumentality of the VA).
  
• The qualified plan maintained by "Other" will not be combined with any other plan if "Other" is a business completely independent of the physician, the University, and the VA (e.g., a publicly traded corporation).
  

For this purpose, I am using "control" to mean any relationship described in Code section 414(B), ©, (m), or (n). Thus, my examples, above, are all merely examples, not complete statements of what relationships will give rise to control.

I hope this makes things clearer. At the very least, it is obvious that the elimination of the maximum exclusion allowance has not necessarily made this area clear and simple.

[Guest Brent Rowell]

Thank You

Its certainly a difficult subject. I think I almost understand it

Thank You

Brent Rowell

[Guest Fishchick]

Bumping this for current discussion on the SEP/SIMPLE Board