Has a SEP but now wants a SH 401k

[Guest dubya]

A small company, 5 ee's plus owner, current has a SEP. The employer would now like to get rid of the SEP and start a safe harbor 401k plan. The employer's fiscal year is 7/1 - 6/30, so if they want this in place for the current tax year (6/30/04), they need to establish it by 4/1/04.

My question, is what deadlines would pertain to eliminating/terminating the SEP? Does it have to be terminated by 3/31/04? Do the participants in the SEP have the same options regarding distributions as say a PS plan would (eg, option to rollover to IRA, new 401k, or cash? Thanks for any help.

[Gary Lesser]

Deductible contributions to SEP reduce the general profit sharing limit by the amount deductible under the SEP. SEP-IRA assets may only be transferrd to a traditional IRA or qualified plan (or 457 trust) that allows. The plan document generally determines when such amounts can be distributed from plan. As a traditional IRA, the account can be accessed 24/7.

If the SEP turns out to be discriminatory upon termination (e.g., contributions made for some, but not all eligible employees for year), then there are more issues that will have to be dealt with (which wd include revised W-2s) and possible deemed excess or nondeductible contributions to IRAs by participants.

Perhaps someone else can indicate if there are any "safe harbor" issues (not by area).

[Guest dubya]

Thanks for your help Gary. I believe the company's SEP runs 7/1 - 6/30 as well. Perhaps you could comment on the following as well.

If they move forward and have the s/h 401k in place by 04/01/2004, should they take steps to "terminate" the SEP by 3/31/2004, and if so, would that mean that ER contributions to the SEP would be based on 9 month comp (7/1/03 - 3/31/04)? They could then make PS contributions based on the 3 month comp. period (4/1/04 - 6/30/04) if they wanted. I realize compensation and contributions for both plans need to be considered when looking at deductibility and 415.

Also, would it change anything for 2003/2004 if the new 401k also includes a new comp profit sharing allocation? Could the company use new comp for all of 2003/2004 for the new plan (if eff date is 7/1/03) or will that portion just have to wait until the 2004/2005 plan year?

Thanks so much.

[Guest dubya]

After doing more research on this, I think I figured out some of the answers to my last post. SEPs really just fade away and since the contribution is discretionary, there is no reason to fund the SEP at all for 03/04. It can all be handled in the new 401(k).

The only point I'm not clear on is whether it matters if the new plan is new comp or not. Since the SEP was pro-rata, does it matter, for 03/04, that it is being replaced by a new comp PS?

Thanks