SEP that excludes controlled group members?

[Guest beppie_stark]

Does anyone have a prototype SEP document that can be limited to the adopting employer and not cover all EEs of the controlled group?

An acquired company happily sponsored a model SEP. The employees like their individual accounts. The new parent would prefer not to upset the new employees but has other employees who will not participate and the parent may wish to sponsor other retirement plans in the future.

I know a 5305 model SEP won't work. Is there a prototype available that would? Or would it be necessary to individually draft a plan or amend a prototype and submit as an individually drafted plan?

Thanks!

[Guest beppie_stark]

Maybe I worded my questions badly? Let me try again.

Has anyone seen a prototype SEP document that would permit the exclusion of members of a controlled group?

Does anyone have experience in using a SEP in a controlled group situation where some members of the controlled group did not participate under the provisions of an approved plan document?

Or is the coverage of all employees of members of a controlled group mandated by the regulations, not only for model SEPs but for all SEPs?

[Bird]

I'm not sure. I couldn't find anything that precludes a member of a controlled group from opening a SEP and not covering other members - yet logic does seem to imply that it shouldn't be possible, since only very limited exclusions are permitted and this would be an easy end-run.

I couldn't find any prototypes that didn't automatically include all members of a controlled group.

[Locust]

A SEP must cover all employees of the employer, and for this purpose the employer includes all members of the controlled group (Code 414(b) and ©), so there can't be a valid SEP that allows the exclusion of nonadopting companies. If you don't want the SEP to cover the new company's employees after they have met the eligibility requirements, the company will have to discontinue All contributions to the SEP.

[John Feldt ERPA CPC QPA]

Through the course of the years, we've seen quite a few prospects where they are surprised that their SEP document (which they think covers only the company that employs only the owner) also requires that they cover the employees of that second company (which is owned by the same owner).

We've also heard claims from experts who state that they've found a foolproof way around those controlled group/affiliated service group rules. When it sounds too good to be true, before the client forges ahead, be sure to recommend a competent ERISA counsel to look into it.

[Gary Lesser]

The controlled group rules are mathematical; there is no way around those rules if they apply.

If the owner is over 59-1/2, the contribution can be made and later withdrawn without penalty.

As previously pointed out, the SEP rules require that all eligible employees be covered (but rates may differ, see below).

The document likely defines the employer as including all other employers that are controlled, related, or affiliated and provides for allocation based in proportion to compensation.

In regard to a PLR, you might wish to see PLR 88224019 (see below), regarding a rate per hour SEP. Compare to Prop. Treas. Reg. Section 1.408-8© regarding uniform allocation requirements. Proposed 1.408-8©(1) provides, in part, that a rate of contribution which decreases as compensation increases shall be considered uniform.

Date: March 17, 1988

Refer Reply to: E:EP:R:9

Dear * * *

This is in response to a ruling request dated December 2, 1987, and a letter amending and updating this request dated January 27, 1988, which were submitted by your authorized representative on your behalf. Your request concerns whether a contribution formula based upon hours worked meets the Simplified Employee Pension (SEP) anti- discrimination requirements of Internal Revenue Code section 408(k)(3).

Your representative submitted the following facts on your behalf:

Company M, a tax exempt organization, entered into a collective bargaining agreement on July 1, 1984. In a revised addendum to this collective bargaining agreement, dated March 13, 1985, Company M agreed to contribute certain amounts for each covered employee into a supplemental pension plan which was to be "an individual account type plan".

On April 1, 1987, Company M adopted a Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement (SEP- IRA Agreement), effective as of December 31, 1986. This SEP-IRA Agreement was designed to provide the individual account type plan provided for in the addendum to the collective bargaining agreement. Further, this SEP-IRA Agreement was adopted using Internal Revenue Service Form 5305-SEP, which you propose to modify in certain respects.

Individual retirement accounts (IRAs) for the employee- participants were established with Company N, which accepted the employer contributions which had been set aside for each employee pursuant to the addendum of the collective bargaining agreement. Pursuant to the SEP-IRA Agreement, SEP contributions by Company M to the IRAs are determined at a stated amount (in cents) for each hour worked by an employee-participant, regardless of the employee's compensation level. The employees of Company M are compensated with a salary and are not compensated for overtime. Further, they are credited with 80 hours of service for each two week payroll period, nothing more and nothing less, and it is this number of hours which is used to determine the SEP contributions.

Based on these facts your authorized representative requests a ruling that the contribution formula set-out in the SEP-IRA Agreement satisfies the requirements of Code section 408(k)(3).

Section 408(k)(3)(A) of the Code provides that the requirements of this section are met with respect to a SEP for a calendar year if for such year the contributions made by the employer to the SEP for his employees do not discriminate in favor of any highly compensated employee.

Code section 408(k)(3)© provides, in relevant part, that employer contributions to SEPs shall be considered discriminatory unless contributions thereto bear a uniform relationship to the total compensation (not in excess of the first $200,000) of each employee maintaining a SEP.

Proposed Income Tax Regulation section 1.408-8©(1) provides, in part, that a rate of contribution which decreases as compensation increases shall be considered uniform.

In this case the maximum percentage of compensation contributed on behalf of a member of the highly compensated employee group will not exceed the percentage of compensation contributed on behalf of any participant who is not a highly compensated employee. In fact, since each employee is credited with 80 hours of service for each two week payroll period and the amount of contribution remains constant despite increases in compensation, the rate of contribution is viewed as decreasing.

Accordingly, we conclude that the contribution formula of the SEP-IRA Agreement shall be considered uniform and is not in and of itself discriminatory, within the meaning of section 408(k)(3) of the Code.

This is not a determination as to the actual operation of this contribution formula contained in the plan, but only a determination as to whether Company M's plan in form retains its SEP status when it contains this contribution formula.

A copy of this ruling has been sent to your authorized representative pursuant to the power of attorney on file with this office.

Sincerely yours,

Allen Katz

Chief, Employee Plans

Rulings Branch