Timing of SEP contributions

[MarZDoates]

Owner has a SEP plan and he wants to fund 2008 now. Can he make contributions to his own SEP IRA now and then make contributions for other eligible employees later in the year? What if the employee doesn't turn 21 until July 2008. Can he go ahead and make a deposit for her now even though she hasn't met eligibility yet? She has already met the service requirement. Thanks.

[Belgarath]

Aside from the smell test, I'd argue that this fails the requirements of 408(k)(5). An employer contribution to the SEP plan must satisfy a written allocation formula. I'd interpret this to mean that for any given contribution, a set percentage of that contribution must be made to the IRA's of all eligible employees. This might also be considered discriminatory under 408(k)(3)©, which says that contributions will be considered discriminatory unless they bear a uniform relationship to the compensation of each employee. If a contribution of (x) is made, with 100% going to the HC and zero to everyone else, I think you fail this.

As to the age 21, I'd say that you cannot contribute for someone not yet eligible without changing the eligibility - e.g.- change it to 20, if they just want to contribute for her now.

[Gary Lesser]

If contributions are made for a plan year, they must be allocated to all eligible employees at the same time. Since the employee will turn age 21 before the plan year ends he or she would be eligible to receive any contributions made for the plan year (regardless of when made). If the individual dies before reaching age 21 the amount would probably become an excess. To do otherwise would likely result in discriminatory contributions being made for the year.

Hope this helps.

[Belgarath]

Gary - what if the employee terminates employment before attaining age 21 - not an uncommon occurrence. If you've contributed, now you have an IRA to which an improper contribution was made, which you must then correct. That can be a real bore. IMHO, it would be better to wait until the employee actually reaches 21, then contribute the same percentage that everyone else already got. What do you think?