Schedule C SEP and 100% owner of sponsor of 401k plan

[Guest johnpetrancosta]

We have an attorney who is self employeed, files a schedule C and maximizes his contribution. There are no ohter employees on his schedule C. In December of 2003 he purchased a 100% interest of a settlement corporation (C corp) that sponsors a 401k plan in which he deferred 7% in 2004.

Questions:

1. Is he required to make the same contribution to the 401k plan that he made for his schedule C plan?

2. Is a self employeed individual allowed to participate in a SEP and a separate plan?

3. Are there any other issued I need to be aware?

If it's not too difficult please provide references for me to provide my client.

[mbozek]

Two comments:

1. contributions to both plans are aggregated for 415 purposes since he owns 100% of both businesses. He can maintain separate plans for each business with different contribution % based upon comp from each business.

2. Need to review Top heavy provisions for 401k plan to see if benefits under the SEP when added to his 401k account result in a top heavy aggregation group under IRC 416(g)(2)(B) which will require 3% contribution for any non key employees who are eligible to participate in 401k plan.

[jaemmons]

From the information provided, it appears that this is a controlled group. As such, any employee of the other company who meets the eligibility requirements under IRC 408(k)(2) must be eligible for SEP contributions by application of IRC 414(b).

IRC 414(b) Employees of controlled group of corporations For purposes of sections 401, 408 (k), 408 (p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563 (a), determined without regard to section 1563 (a)(4) and (e)(3)©) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404 (a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary.

[Guest johnpetrancosta]

Based on jaemmons reply, is it my understanding that all of the employees of the settlement corporation are to receive the maximum contributions under the SEP plan since it's a controlled group?

Does it matter that the schedule C is not a corporation?

[jaemmons]

No. See IRS 414©

© Employees of partnerships, proprietorships, etc., which are under common control For purposes of sections 401, 408 (k), 408 (p), 410, 411, 415, and 416, under regulations prescribed by the Secretary, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (b).

[Guest johnpetrancosta]

So the employees of the settlement corp must receive the same percentage (max) that the sole proprietor gave to himself.

[jaemmons]

As long as they met the eligibility requirements under IRC 408(k).

[Guest johnpetrancosta]

1. If he purchased the majority interest in 2003, do you calculate the service requirement under 408(k) (3 out of the past 5 years) from when he was 100% owner, or from each employees hire date, before he became a 100% owner. The original purchase was a stock sale. - Example: the SEP was not available to them until he purchased the stock and it became a controlled group. Therefore, do you have to include service prior to it becoming a controlled group.

Assuming you have to include prior service:

2. If 2004 1040 was already filed and the SEP contribution already made, is there a way to correct. Can we ammend the 1040 and remove the deduction and treat the SEP contribution as an excess contribution and return it in 2005? Is there a way to refund to the contribution and avoid the excise tax on excess contributions?

[mbozek]

SEP contributions are only required for employees with service in in 3 of last 5 yrs. Need to review how this applied in 04 since employees of C corp were not part of controlled group with employer who maintained SEP before 03. Years of svc for SEP contributions may only be attributed after C Corp became part of controlled gp with law practice which would be only 2 yrs in 04.

[Lame Duck]

mbozek said it in the first post, but it may have been missed in the ensuing conversation so I will state it again. The benefits provided under both the SEP and the 401(k) plans need to be aggregated for purposes of the maximum contribution limits under code Section 415. You stated that he deferred 7% under the 401(k) plan and made the maximum contribution to the SEP. The total of the two contributions could not exceed $41,000 ($44,000 if age 50 or older) for 2004. Even though the 401(k) deferral is not considered for purposes of the 25% of compensation deductible limit, it must be considered for purposes of the limitations on contributions under 415.