SEP eligibility and longevity

[Santo Gold]

I need the SEP/SIMPLE Answer Book!!!! I'll be ordering next week. In the meantime, maybe someone can help me with a few SEP questions, ranging from easiest to hardest:

S-Corp started in June, 2002 with 2 equal (50/50) owners. No other ee's in 2002, just them, but they take no comp. In 2003, both take a salary. They also hire 2 p/t people. In 2004, they are again taking salary and expect to make a lot of money. They 2 p/t people leave in 2004, and are replaced in July, 2004 with 4 new p/t people. Owners objective is to start a SEP in 2004 that will include them (owners only) and not the others.

1. Would the eligibility have to be set at "having performed services in 2 of the previous 5 years" to get the 2 owners in (3 out of 5 would keep them out for 2004, correct)? Would the minumum wages have to be $0 since they were not paid in 2002? Also, if 2 out of 5 is correct, would that mean the 4 new p/t people will not enter until 1/1/2006?

2. Assume all of the p/t people work less than 1000 hours. Can the employer terminate the SEP after 2005, start a PS or 401k in 2006 with a 1 Year of Service/1000 hour eligibility requirement, and have everyone excluded other than the 2 owners?

3. I believe 415 applies to SEP's so if they contribute $3,000 each to the IRA, they can receive up to a $38,000 employer allocation each in the SEP? Is this correct?

4. Employer also uses around 20 leased employees from a hospital. These employees are covered under the hospitals DB plan. I think the ER reimburses the hospital for all wages and benefits including the DB plan. Do these leased employees have to be covered in the SEP?

5. Finally, can the company borrow from the 2 owners to fund the SEP?

This is quite a laundry list so thanks for any comments. I'd rather stick to 401ks.

[Gary Lesser]

You are mainly correct.

Wise choice (about the book), but wait. The new 10th edition of the SIMPLE, SEP, and SARSEP Answer Book will be available in late November. The book can be ordered by calling 800-638-8437. The AICPA has a book called The CPA's Guide To Retirement Plans for Small Businesses, that INCLUDES software for preparing illustrations. See,

AICPA's CPA Book Link--with software

Aspen's SEP Answer Book Link

1. Would the eligibility have to be set at "having performed services in 2 of the previous 5 years" to get the 2 owners in (3 out of 5 would keep them out for 2004, correct)? Yes (yes).

Would the minumum wages have to be $0 since they were not paid in 2002?

No. The minumum wage limit of $450 is a current year requirement only. Owners appear to earn at least $450 and wd therefore participate for 2004.

Also, if 2 out of 5 is correct, would that mean the 4 new p/t people will not enter until 1/1/2006? Correct, assuming they earn at least $450 (as indexed) for 2006.

2. Assume all of the p/t people work less than 1000 hours. Can the employer terminate the SEP after 2005, start a PS or 401k in 2006 with a 1 Year of Service/1000 hour eligibility requirement, and have everyone excluded other than the 2 owners? Assuming the SEP termination is effective for the 2005 CY, then YES.

3. I believe 415 applies to SEP's so if they contribute $3,000 each to the IRA, they can receive up to a $38,000 employer allocation each in the SEP? Is this correct?

Annual IRA contributions do not reduce the otherwise applicable $41,000 limit, but participation in the SEP is likely to eliminate the deduction for IRA contributions. Regardless, a Roth IRA may be a better alternative.

4. Employer also uses around 20 leased employees from a hospital. These employees are covered under the hospitals DB plan. I think the ER reimburses the hospital for all wages and benefits including the DB plan. Do these leased employees have to be covered in the SEP?

Because of the leased employees, a (non-model) prototype or individually designed SEP wd have to be used. Either way, the leased emplyee's are treated as the S-corporation's employees unless certain rules are met, the plan contains such provisions, and the employer elects (if an option) to exclude those employees. One of the rules, however, require that the lessor contribute at least 10 percent of compensation to a "money purchase pension plan." A defined benefit pension plan, regardless of the benefits provided, does not meet the coverage exception. Also, leased employee's can not can not constitute more than 20 percent of S-corporation's NHC employee's workforce (as it would seem to do here).

Note: if the leased employees are also the S-corporation's common-law-employees, then there is no exclusion available under the leased empoloyee rules. See IRC 414(n)

5. Finally, can the company borrow from the 2 owners to fund the SEP?

Sure, if they got the cash or can pledge a loan to the S-corporation.

Hope this helps. Also, consider an integrated SEP.

[Santo Gold]

Gary - Regarding Leased ee's in point #4, I thought if the defined benefit was tested and determined to be of greater value than a 10% MP, then no benefit would be needed for the leased ees in the ER's plan. Am I incorrect?

Thanks

[Gary Lesser]

Maybe, but this is a SEP and the qualified plan discrimination rules are inapplicable to the SEP (the SEP stands, or fails, on its own).