SEP Eligibility and Deduction Limit

[Guest rgorman]

SEP Plan has three year requirement. Employee has three years and would be eligible for a contribution in 2002. Employee terminates in November 2002. Is the employee still eligible for the 2002contribution since no hour or last day requirement allowed in SEP?

Second - To utilize the increased deduction limit of 25% of compensation for 2002, did the employer have to have amended the plan for EGTRRA in 2002. If they sign in 2003, would the new 25% only be effective for 2003 contributions and the 15% still apply to 2002 contributions?

[mbozek]

As a general rule sep contributions are required if employee performs any service in last three years without regard to age or service requirements. SEp contribution can be made at any time up to the date for filing the return with extensions. In 2002 SEP deduction limit is 25% of comp. which is taken on 1040 return. See IRS pub 590, available on the IRS web site, for further information on SEPs.

[Appleby]

Since the employee meets the service requirement (and apparently any other eligibility requirements) he/she must receive a 2002 contribution. The contribution will be based on the total compensation paid to him/her by the employer.

Regarding the EGTRRA issue, SEP participants should have been notified of the new contributions limits and other changes by October 1,2002. This in itself is sufficient amendment for EGTRRA... which means the employer is allowed to make deductible contributions up to 25 percent of compensation. For Prototypes SEPs, the Prototype sponsor was required to apply for an opinion letter by December 31,2002. The Prototype SEP must be amended within 180 days of the Prototype sponsor receiving the opinion letter. In the meantime, the employer is allowed to operate under the provisions of GUST and EGTRRA...this includes year 2002.

[Gary Lesser]

Cite: See Proposed Treasury Regulations Section 1.408-7(d)(2) regarding execution of documents and example in 1.408-7(d)(5).