Terminating SEP plan, correcting prior years deposits

[Guest bmurphy]

Non-profit maintains a SEP on a fiscal year (7/1-6/30). Looking to term SEP & start a DC plan. Can they term & adopt "as-of" 7/1/04 which is first day of current fiscal year. Or do they term SEP as of current date, make contribution for partial year, & then adopt DC plan?

In reviewing SEP plan for termination it was found that some part-time ee's who should have gotten a contribution from employer in past years didn't. What is the preferred way to correct this before plan moves over to DC?

[Gary Lesser]

You can terminate the SEP "on" the date you terminate it. Contributions for current year are probably discretionary. You might be able to use the voluntary correction procedures in Rev Proc 2003-44 for those that missed prior year contributions. Unless the error is egregious, IRS approval may not be necessary. Essentially, contributions will be made adjusted for any gain (other requirements must also be satisfied). A "reasonable" rate of interest is generally used in the case of a SEP.

[Gary Lesser]

Incidently, it may also be a good idea for the adopting employer to notify the trustee/custodian of the termination and that no further SEP contributions will be made. Do not terminate until after it is fixed. Thereafter, the SEP-IRAs will be treated as IRAs unconnected with a SEP. Request for updating sponsor's SEP documents will also likely be discontinued. Employees should also be notified of the discontinuance. Hope this helps.