Why does the IRS insist upon pain of sanction that one may not maintain a model SEP alongside another retirement plan?

[Guest Enda80]

Why does the IRS insist upon pain of sanction that one may not maintain a model SEP alongside another retirement plan?

[Guest Sieve]

I presume it's because IRS Form 5305-SEP contains no provisions relating to certain limitations that might be impacted by the employer maintaining another plan (e.g., IRC Section 415). Likewise, Form 5305-SEP contributions must be made on a pro rata basis because the IRS model SEP contains no permitted disparity provisions.

In short, the IRS Model SEP is a very limited program

[J Simmons]

Larry, with a non-model SEP, could the ER also have a cross-tested plan and permissively aggregate, putting the gateway contribution into the SEP IRAs and just the other contributions into the cross-tested plan's trust? If so, then the cross-tested plan fiduciaries would not have investment and management responsibility for the assets in the SEP IRAs (which would be the only benefits for those that do not receive more than the gateway)? I've not dealt with a situation where the employer had both a SEP and a 401a plan (and only been involved in replacing a SEP with a 401a plan on January 1 of the next year).

[Guest Sieve]

John --

Unless I'm missing something, I don't think that would work, because the definition of "plan", for purposes of IRC Section 401(a)(4), goes through IRC Sections 410(b), 414(l) & 411 and comes out by including only a tax-qualified plan under Section 401(a) and an annuity under Section 403(a) (and not an SEP under Section 408(k)). So, even though some tax-qualified plan rules apply to an SEP through specific reference--e.g., IRC Sections 416 (see IRC Section 408(k)(1)(B)) & 415 (see IRC Section 415(a)(2)©) & 401(l) (see IRC Section 408(k)(3)(D)) & 414(q) (see IRC Section 408(k)(3)(A)) & 401(a)(17) (see IRC Section 408(k)(8))--aggregating a qualified plan with an SEP under IRC Sections 410(b) or 401(a)(4) is not specifically permitted.

By the way, I see no provision which prevents an SEP from being maintained by an employer also maintaining a tax-qualified plan. As a matter of fact, IRC Section 408(h)(2) seems specifically to contemplate a deduction for a qualifed plan being reduced by the amount of any deduction for an SEP.

[J Simmons]

Thanks, Larry. It appears that the extent of aggregation between a SEP and QRP is just for purposes of applying the 404 deduction limit. Darn. It would be a nice trick to be able to avoid fiduciary duties for asset management issues for staff employees by stuffing the company contributions for them into IRAs. But, apparently not to be.