SEP Sponsored by Local Union

[Guest SCUDDESLER]

A local union represents a universe of about 1000 employee/union members. Of this group, only 10 or 12 work on "special projects". These special projects are also projects subject to the Davis-Bacon Act. These 10 or 12 individuals work on the special projects for approximately 1/2 of the year (or about 800 hours per year). The employers would like to pay a portion of the prevailing wage to this small universe of individuals in the form of a retirement benefit without having each employer install a separate qualified retirement plan for its employees. The retirement benefit paid by the employers would be made to a SEP established by the local union. The local union proposes to sponsor the SEP and restrict participation only to union members who fit a particular job classification--which, as noted above, currently covers only about 10 or 12 of the union's 1,000 employee/union members.

I have a number of questions:

(1) can the local union sponsor a SEP (it appears that only "employers" may sponsor SEPs and the local union is not technically an employer)?

(2) assuming the local union can sponsor a SEP, can eligibility be restricted to decorative sheet metal workers (i.e., the small subgroup of union members which at the moment consists of 10 to 12 individuals)? The eligibility rules applicable to SEPs suggest to me that all employees except for those who satisfy prescribed list of exclusions must be covered by the SEP.

(3) finally, assuming (1) and (2) are not problems, different participants will work on different projects at the same time and the participants working on Project A may receive a larger contribution (based on their Davis-Bacon pay) than participants working on Project B. This differential seems to violate the uniform contribution requirement. It also seems problematic that only Davis-Bacon pay will be taken into account in determining the contribution as opposed to W-2 pay.

Thanks in advance for any thoughts.

[Gary Lesser]

(1) can the local union sponsor a SEP (it appears that only "employers" may sponsor SEPs and the local union is not technically an employer)?

It may be an employer eligible to adopt a SEP, but only eligible employees of the union may participate. Perhaps the union can be "involved" in the formation of a group trust (or group IRA trust) for employers to make contributions into.

The local union could establish an IRA trust into which SEP contributions made by employers could be made.

(2) assuming the local union can sponsor a SEP, can eligibility be restricted to decorative sheet metal workers (i.e., the small subgroup of union members which at the moment consists of 10 to 12 individuals)? The eligibility rules applicable to SEPs suggest to me that all employees except for those who satisfy prescribed list of exclusions must be covered by the SEP.

True. Eligibility must be extended to all employees that satisfy age, service, and compensation requirements, in any are specified in the plan. Unionized employees may generally be excluded, but not covered exclusively.

(3) finally, assuming (1) and (2) are not problems, different participants will work on different projects at the same time and the participants working on Project A may receive a larger contribution (based on their Davis-Bacon pay) than participants working on Project B. This differential seems to violate the uniform contribution requirement. It also seems problematic that only Davis-Bacon pay will be taken into account in determining the contribution as opposed to W-2 pay.

Keeping in mind that (1) and (2) are problems. If discrimination does not result, a private letter ruling might permit. IRS has approved SEP contributions based on an hourly rate (Ltr Rul 8224019) that was not discriminatory.

Hope this helps.