SARSEP and New DB plan

[Guest elem]

Can a SARSEP coexist with a Defined Benefit Plan? If so, would the overall 25% of compensation apply as the deductible limit.

[Guest elem]

After reading some older posts, I decide to restate my question.

I have a sole proprietor who currently maintains a SARSEP. They have already made contributions to the SARSEP for the year ($40,000), but they are considering a Defined Benefit Plan to allow a larger deduction.

I am assuming that this is a 5305-SEP, but I don't know for sure. Assuming it is:

Can we establish a DB plan in 2004, revert the SARSEP contribution back to the owner, and make a contribution equal to the DB maximum to the DB Plan?

If this is a 5305-SEP, I am assuming that we can't maintain it and also add a DB Plan. I don't think we would want to maintain it considering that its existence would limit overall contributions to 25% of compensation.

Do we need to do anything to stop the SARSEP, or does it just essentially become a regular IRA?

Thanks

[Gary Lesser]

The 25% limit does apply. The contributions can not be returned to employer. If DB established, there will probably be an nondeducible contribution subject to penalty tax (until corrected/used up). The nondeductible SEP/SARSEP contributions may not be able to be used up and the penalty apply forever; but it may be worth it.