SARSEP limit after EGTRRA and tech correction??

[maverick]

One of our other offices has a client with a SARSEP plan. Since I don't take care of any of these plans myself, my knowledge of SARSEP rules is limited to what I read in various references, most notably benefitlink.com. I read Gary's sticky topic, but still am confused. Can someone please respond to the following?

Did the tech corrections act resolve the problem with an individual trying to defer 25%, (but the overall employer deduction is limited to 15%)? The 15% however, does not include the employee's deferral amounts.

Thanks. Maverick

[Guest mburk]

I am a participant in a SARSEP and was also thoroughly confused by Gary Lesser's post. My understanding is that earnings must first be reduced by Employer contributions, then the 25% employee contribution can be applied. Like this?

Employee, age 25, wages of $40000.

Employer contributes 5% annually or $2000.

Employee limit: (40000-2000) x 25% = 9500.

Or have I missed something? This all very frustrating for me.

[Guest TaxBill]

Coupled with that confusion how will the individual age 50 and over make their catch-up contribution? So if I max out my salary deferral contribution $11000, and want to make the catch-up do I just fill out a personal check and send it to the financial institution my account is with?

The catch-up contribution must be forwarded by your employer pursuant to a salary deferral election.---GSL

[Gary Lesser]

I guess you mean me.

We all agree that elective deferrals reduced the base upon which the 25 percent exclusion is calculated under 402(h). The issue is whether catch-up elective reduce the base also.

Example 1. Joe earns $10,000 and defers $2,000 of it into his SARSEP. Any employer contrbutions would be be taxable to the participant because only $2,000 of the total contributions can be excluded from Joe's income.

($10,000 - $2,000) x .25% = $2,000

Example 2. Same facts but Joe only $1,000. $2,250 ($9,000 - $1,000) is the maximum excludible contribution (assumes $1,250 of employer money).

Example 3. Joe now earns $100,000 and excludes $11,000 and a catch up contribution of $1,000. THE PROBLEM -- How much can Joe receive, in total, without including any of it in income.

(a) $89,000 x .25, or

(B) $88,000 x .25.

The IRS has indicated that (B) is correct. I believe that (a) is correct.

The problem is if Joe is age 50 or older, if so, can only $2,000 be contributed and excluded, or must the $10,000 be reduced by the elective INCLUDING catch-up elective contribution.

Hope this helps.