SARSEP and Profit Sharing Plan

[FJR]

We inherited a new client in 2002 who has an existing SARSEP. They adopted a new Profit sharing plan at the end of 2002, presumebly to fund it with an employer contribution. I don't know to much about SARSEPs, but can the following occur.

Assume the prototype document allows for the adoption of a qualified plan in the same year. Also, no employer contribution has gone to the SEP. Assume they are TH.

Can they simply fund the Profit Sharing for 2002 to include those who were eligible under the SARSEP and not fund the SEP?

If so, I assume they can use permitted disparity under the Profit Sharing plan?

Anything else come to mind would be appreciated..

[Gary Lesser]

Deductible contributions to a SEP/SARSEP merely eat up the otherwise available deductible P/S limit (see IRC 402(h)). The P/S plan can cover only those employees that are eligible under its terms. If no SEP/SARSEP contributions have been made for the year, then the SEP/SARSEP does not require a top-heavy contribution. Even if it did, a SEP/SARSEP may provide that any required top-heavy contribution be made to some other plan. Also, if less than 50% of eligible employees elect to defer, then the plan is not a SARSEP for that year.

In general, the P/S can be fully integrated, assuming integrated contributions are not made to the SEP.

[FJR]

Let me clarify. The plan is a SARSEP. The two highly and Key employees defered compensation to the plan for 2002. The NHCE also defered. They are top heavy. Let assume they pass the ADP test.

Wouldn't they owe a TH min.?

If so, you are saying they could make to to the new profit sharing plan set up in 2002. I assume it would go to only those eligible under the SARSEP?

If they can contribute to the new PS plan, and the EGTRRA amendment is signed, they really wouldn't have much of a deduction problem since the only contribution was made through salary deferrals.

[Gary Lesser]

Agreed that the deduction limit is probably not an issue.

If either plan is top-heavy, then both are top heavy.

What does the SEP read? Will T/H contributions be made to it or some other plan? If it does not state, then make the T-H contribution to the SEP.

If there is a participant in the QP that isn't in the SEP then they too must get a T-H contribution (into the QP).

Contributions to the P/S can be fully integrated if the SEP is not integrated.

It is not necessary to give more than one T-H contribution to any participant.

I think (hope) this fully answers your Qs.

[Guest Fishchick]

Note that if the employer is using the Model 5305 A-SEP, they are not able to use a qualified plan concurrently. See "Do Not Use this Form if...Item 2"