Stopping Employer Contributions to a SEP

[Guest NPWA]

I'd very much appreciate the group's thoughts on the following. I've worked mostly with qualified plans and I'm not terribly familiar with SEPs. Here goes:

Facts:

A very small (4 employee) organization offered a SEP-IRA, completely funded by employer contributions.

In terms of payroll reporting and W-2s, the amount of the SEP-IRA contribution was characterized as an "employee contribution," on the theory that the company would gross employees up for the amount of the SEP-IRA contribution and then characterize it as a pre-tax employee contribution (not sure if this is the correct or appropriate way to do that).

Head of the company decided that the company could not afford to make SEP-IRA contributions. No further contributions were made to anyone's SEP-IRA. There is no documentation of this decision--no Board action, no memo, no change to the SEP-IRA form document, nothing but a decision by the president. The other employees were apparently not notified of the change.

Through a miscommunication, however, the company's payroll vendor continued to reflect "deductions" for the "employee contributions" to the SEP-IRAs even though no money was going into those accounts.

One of the four employees has left the company and has now complained to the Department of Labor that her SEP-IRA never received the approximately $9000 that her W-2 says was withheld from her pay as employee contributions to the SEP-IRA (the $9000 related to the period of time after the contributions were stopped).

The Department of Labor is now demanding that the company make the contribution with interest to the former employee's IRA.

My questions:

Can anyone see an argument that they may be able to make to the DOL since they never intended to make this contribution? Is the fact that they did not document the discontinuance of employer contributions a problem in light of the requirement that a SEP have a "written allocation formula"?

My (tentative) conclusion:

It may be in the company's best interest to make the contribution, rather than try to establish that the contributions were stopped and payroll errors were made.

Any thoughts or suggestions are appreciated--many thanks.

[jevd]

The way the employer handled the plan, it sounds more like a SAR-SEP than a SEP funded with employer contributions. That brings in a multitude of questions.

1. Was there a SAR-SEP document signed by the employer.

2. Were deferral agreements signed by the employees.

3. Was the plan started before SAR-SEPS were discontinued.

4. Were contributions made within 402(g) limits each year.

It could be that the employer has a lot more to worry about besides the issues you mentioned regarding notificatioon.

I'd say get thee to an ERISA Attorney. FAST!

[Gary Lesser]

ALL of the facts are really neeed here, and with that in mind, if the plan is just a SEP, there is no elective plan to receive it (not a plan asset). And the amounts do not appear to be valid SEP contributions either. So, that still leaves you with a DOL problem, but not necessary a penson problem. I wouldn't discount the possibility of a crime either (e.g., theft, conversion). If there is a SARSEP, then you got DOL and IRS problems (2 correction procedures, lots of legal fees and many many penalties with competing correction procedures). But, it might not be a valid SARSEP either! Perhaps it's just a wage issue. Hopefully, it isn't a fiduciary issue? Possible crimes aside, this would be a lot easier to fix if not a pension problem.

Was withholding and/or social security taxes deducted/paid on set-asides? If yes, itwould appear to be something other than elective (unless SARSEP exists).

I agree with jevd, except that I'm not too sure what type of attorney or attoneys are needed. And I'd get one soon. There may be S-of-L issues that can be resolved in your favor.

I don't believe for a second that employer overlooked resulting windfall. Four rules come to mind:

Once you have their money, you never give it back. [FROA #1]

If it's free, take it and worry about hidden costs later. [FROA #37]

Employees are the rungs on the latter of success; don't hesitate to step on them. [FROA #211]

SEPs and SARSEPs are very unforgiving; pray you have neither. [GSL #2].