SEP % limit

[Guest kdm]

A SEP plan sponsor wants to make a 25% contribution for the eligible employees. However, the owner earns well in excess of the compensation cap of 200K. So is he limited to 20% for the employees since 40K is 20% of 200K, or can he say he chose 25% and was limited to 40K on his SEP but still contribute 25% on behalf of employees below 200K?

[Gary Lesser]

Yes. The 25% contribution is merely capped for the HCE at $40,000 (assuming the plan is not integrated with social security).

[Guest kdm]

So what is the answer to the above question; 20% or 25% that can be contributed to the employees?

[Gary Lesser]

If you want the lower paid to get 25% you must contribute 25%. If you're allocating a dollar amount, that's 25% of compensation up to $160,000. If any more is contributed, the excess amount is not deductible. If you must specify a percentage allocation, then use 25 percent.

If you contribute 20% of total (up to $200,000) compensation, everyone will be allocated more than 20, at least one will hit the $40,000 limit.

Remember, too, that the 415 limit is 100% of compensation up to $40,000 limit. $41,000 if catch-up for 2002.