Fund IRA but not SEP

[Guest Steve Palmer]

Self-employed individual (employer) has maintained and funded a SEP for many years. Hired an employee a few years ago who became eligible for an employer contribution in 2009 if the employer decides to fund the SEP, since it is discretionary.

Question: If the employer decides not to fund the SEP for 2009, can she make a contribution to her traditional IRA and avoid funding anything for the employee?

Second part: If the employer does not fund the SEP for 2009, is the employee still tainted as a participant in an employer sponsored plan and potentially limited in the deductibility of his own traditional IRA contribution?

Thank you.

[Bird]

If the employer decides not to fund the SEP for 2009, can she make a contribution to her traditional IRA and avoid funding anything for the employee?

Yes. Deductibility will depend on income and/or whether the 2008 contribution was treated as 2009 for this purpose (participation in a qualified plan).

If the employer does not fund the SEP for 2009, is the employee still tainted as a participant in an employer sponsored plan and potentially limited in the deductibility of his own traditional IRA contribution?

No.