SEP IRA- June 30th Year End-Protoype vs 5305-SEP

[Guest Nicholas]

Greetings-

I am aware that the IRS prohibits the use of the standard 5305-SEP if you want to set up a fiscal year end. My current investment group (BofA) does not seem to have a prototype SEP Agreement available to accommodate our 6/30 year end. FYI: Wamu seems to have a prototype SEP IRA plan that accommodates the Fiscal Year end based on my review of their SEP Application that references a box to check for plan year: "The 12-consecutive month period which coincides with the Adopting Employer’s fiscal year".

I know it is not a deal breaker if I set up the plan on a Calendar Year when our Fiscal Year is 6/30. I read previously in a post on this forum that it would just impact the timing of the contribution. IRS Pub 560 gives a pretty good example of a situation where this would apply.

But: would it be an advantage to set the new SEP IRA on a fiscal year end?

We have until the due date of this extended IRS 990 to contribute for our 06/07 tax year. If we make SEP contributions for this 06/07 year what tax year would the contribution go to? 2006 or 2007? Would the answer to this question be different if we were on a Fiscal Year Plan as opposed to a Calendar Year?

Thanks for your insight.

[Gary Lesser]

If the SEP is maintained on a calendar year basis (e.g., 2007), the deduction for the contributions made for the calendar plan year will not be deductible until the fiscal tax year end of 6/30/08. Thus, deductions are off-cycled by 6 months. If the plan year and fiscal year are the same, the deduction is claimed sooner (that is, shortly after the end of the plan year). Either way, contributions have to be made by the due date of the federal return(s).

If the plan has a fiscal plan year it may (or may not) be easier to maintain records and administer the plan. If the plan year is not the same as the employer's taxable year, "compensation" for deduction purposes (the 25% limit) is compensation paid to the eligible employee during the calendar year ending in the employer's taxable year. Depending on the level of contributins (if high) and lower earlier wages (if low), the deduction limit could be affected with a calendar year plan. [iRC 404(h)(1)(A)]

A prototype SEP will be needed to utilize a the fiscal year as the plan year. Hope this helps.