HCE optout

[wsp]

I have a client who is in the entertainment industry. She currently employs two individuals and all others associated with her are paid on a contract basis. Years ago they switched the plan from a profit sharing plan to a SEP-IRA. At this time her balance was sufficiently high enough that she didn't make contributions for herself, only her two employees. I wasn't involved so I'm not sure of the logic there. So, the question is can an employer opt out of receiving a SEP-IRA contribution. I know that they can write it into a qualified plan document that HCE's are excluded from contributions but I wasn't sure about the SEP.

Since there was no amendment in place opting out years ago and I am assuming she should have been covered, what income gets used to determine a contribution? is it only w-2 and schedule c income? And if there is a loss on the Schedule C? Do they then legitimately not make a contribution for her?

And going back and making her whole..I am assuming that I go about it the same way is if a person was ommitted from a profit sharing contribution?

Any help would be appreciated...

[Gary Lesser]

The W-2 income is not offest by a schedule C loss.

Unfortunately, ALL eligible employees must recieve a contribution. Since the lowest common demoninator is "0" (because an eligible employee wasn't covered) none of the contributions for any of the employees are any good. All contributions are excess contributions. See example in Prop Treas Reg Sec 1.408-7(f)(2).

That being said, the VCP procedures contained in Rev Proc 2003-44 cd be used to fix this error. By itself, this error is not egregious. Self correction might even be possible. Because deductibility, participant exclusion, and 415 issues, the make-up contribution(s) will probably cause a few other issues to be raised. An actual application to the Service under Rev Proc 2003-44 would probably be best.

Let me know if you need someone that can handle a VCP application for your client. I'd be happy to recommend someone.