prototype plan document for SEP-IRA plan that allows contributions to

[Guest Barbara Roper]

Our small (20-person) non-profit offers both a SEP-IRA, to which our employer contributes about five percent of employee salary each year, and a voluntary 401(k) to which the employer does not make contributions. It is our understanding that, under the SEP-IRA requirements, we must maintain a prototype plan document that allows contributions to both a 401(k) and a SEP- IRA. Our SEP-IRA provider, Vanguard, no longer makes such a document available to small groups such as our own. Our 401(k) provider, Paychex, has said it cannot provide such a document. It has also mentioned that our plans need to be co-tested -- information that is new to us one year into providing the 401(k). I have several questions: 1) Are we right in thinking we need to maintain a prototype plan document for a plan that allows contributions to both a 401(k) plan and a SEP-IRA? 2) If so, does anyone know how we can get such a document? 3) Is our 401(k) provider correct in telling us that the plans need to be co-tested? 4) If so, does anyone know who provides such services and what we should expect to pay?

[Appleby]

Barbara,

Yes. A 5305-SEP cannot be used if the plan sponsor adopts the SEP along with a qualified plan ( refer to IRS Form 5305-SEP). Instead, a prototype SEP must be used.

Alternatively, have you considered adding a profit sharing feature to the 401(k) plan? The contributions and deduction limits are same as those for a SEP. Plus you will save money on account fees by consolidating the assets into one account (instead of the required two- one for the SEP and the other for the 401(k))

[Guest Barbara Roper]

Thank you for your reply. I have a question about it, which will reveal my general level of ignorance in these matters.

Does the fact that we need a prototype SEP mean we can't maintain our current SEP-IRA, or does it simply mean we need a different form for reporting on the SEP? Is a prototype SEP likely to be subject to different conditions than our current account?

On the profit-sharing question, does the fact that we are a non-profit affect our ability to add a profit-sharing feature to the 401(k)?

We have reasons for wanting to maintain our SEP-IRA, because we prefer the low fees and wide selection of funds that Vanguard offers. As a practical matter, is there a way we can continue to offer the SEP with Vanguard if Vanguard will not provide the prototype SEP document?

I'd appreciate any insight you or others may have.

[Gary Lesser]

The $40,000 limit under a SEP is reduced for HCEs if the plan is integrated. There is also a 25% limit on allocations based on taxable compensation (gross compensation reduced by non-catch-up elective).

Otherwise the amounts deductible under the SEP eat away at the allowable P/S limit under Code Section 404(h).

Other institutions have prototype documents that allow a SEP in combination with 401(k) plan.