Defined Benefit and SEP IRA

[Guest AbbyP]

Client's compensation is $200,000 per year

Contributes $100,000 to DB plan.

How much can she add to SEP IRA?

Thanks

Also posted in Defined Benefit forum

[Gary Lesser]

IRC 415(e) limit was repealed several years ago. Ignore the DB plan. Can contribute 415 limit (but excludible portion under 402(h)may be lower if SARSEP). Must use prototype or individually designed SEP/SARSEP document for document reliance.

$200,000 x .25% is allowable (up to $49,000*), excludible, and deductible if SEP + required DB amount.

If SARSEP, $200,000 x 25% is allowable (up to $49,000* and depending on definition of compensation used in document), but only 25% of includible compensation (including catch-up contributions, but excluding basic elective) is excludible from participant's income. The deductible limit is 25% of compensation (but not all is necessarily excludible from income). Generally, employers limit contributions (by design) to the excludible amount under 402(h).

* Note. $49,000 limit is reduced if integrated.

Assumes that other plan is a "pure" defined benefit plan.

[David MacLennan]

Not so fast - you probably want to consider deduction limits. 404(a)(7) combined plan deduction limit also applies to SEP / DB combination.

Also, is the compensation earned income or W-2?

Does the business have employees other than owner? If so, is it PBGC covered?

[Guest AbbyP]

Thanks Gary,

That's what I thought. But got confused by this from WRERA

If an employer sponsors one or more defined benefit plans and one or more defined

contribution plans that cover at least one of the same employees, an overall deduction limitation

applies to the total contributions to all plans for a plan year. The overall deduction limit is

generally the greater of (1) 25 percent of compensation or (2) the amount necessary to meet the

minimum funding requirement of the defined benefit plan for the plan year. The Act provides

that the overall deduction limit applies to contributions to one or more defined contribution plans

only to the extent that such contributions exceed six percent of compensation. IRS guidance

(Notice 2007-28, 2007-14 I.R.B. 880) takes the position that if defined contribution plan

contributions are less than six percent of compensation, contributions to the defined benefit plan

are still subject to limitation of the greater of 25 percent of compensation or the minimum

required contribution. The provision provides that if defined contributions are less than six

percent of compensation, the defined benefit plan is not subject to the overall deduction limit. If

defined contributions exceed six percent of compensation, only defined contributions in excess

of six percent are counted toward the overall deduction limit.

Thanks

[mwyatt]

Too bad that this is somehow getting mixed up on two threads, but a husband and wife plan not covered by PBGC is subject to the 6% limit for DC. That was why so many folks here were asking about PBGC coverage. Is true that for 2008 forward, combination plans where the DB plan is subject to Title IV coverage are exempt from the 404 combined limits.