DB with old SEP

[pompton]

Client establishes new DB plan eff 1/1/06. Later on advises that made a SEP contribution in 2006 for 2006. Is the SEP treated as a profit sharing plan for purposes of the deduction rules? Can the deduction for the SEP be had if the SEP contribution is equal to or less than 6% of eligible comp under PPA for 2006?

[Guest Carol the Writer]

Our understanding here is that you cannot have a qualified plan and a SEP for the same taxable year. This would disqualify the deductibility of the SEP contributions by the employer. Carol Caruthers, MSPA, EA

[JAY21]

Carol, I could be wrong but I thought what you said is true only if the SEP is on the IRS Model SEP Form (Form 5305 ???) but if it's on say an investment prototype doc then it doesn't have to be the only plan sponsored by the employer. However, I'm unable to comment on the 6% deduction contribution whether a SEP can be utilized for that.

[Guest mjb]

The prohibition against maintining another plan applies to a SIMPLE plan, not a SEP. SEP contributions are deducted by the employer as amounts made to a DC plan. Need to check the PPA amendments.

[JAY21]

I think the attached insert (file) explains what I mean about the model SEP doc.

SEP.pdf

[saabraa]

I agree with JAY21 in that it's mainly the Model SEP that has the prohibition against the second plan. A Sep plan that lacks the prohibition language is free to exist along with another plan. You might be able to cure a problem with the document by amending the Sep onto a different document. The correction revenue procedure, 2006-27, states that not following the Sep plan document is a 'qualification failure' for the Sep.

The Sep is considered a DC for deduction purposes, though it may not directly say this anywhere---There are a couple of places in IRS writings where the Sep is called a DC equivalent; I think one is regarding section 415 . Section 404(h) says a Sep is subject to section 404. Section 404(a)(7)(a)(i) allows a deduction for the 2 plans combined which amounts to the greater of 25% of comp or the funding limit. I'm pretty sure the PPA change isn't effective until 2007. If too much has been contributed in total, the best cure is removing the excess from the Sep.