Profit Sharing and SEP

[DP]

An employee receives the maximum contribution of $49,000 in his employer's Profit Sharing plan. He has a 33% ownership in his employer's company. Can he also contribute the maximum amount to his SEP during the same plan year?

I saw some discussion on this topic back about 4 or 5 years ago and it was permissible then. Have the rules changed since then?

[Jim Chad]

Maybe, yes. Depending on any other connections between businesses, owners or relatives. There is one "business relationship" that has no common ownership requirement. This is not simple.

The best source I know to help you figure this out is a book called "Who's the employer?" by Derrin Watson

[Gary Lesser]

DP. Is the source of the SEP income an entity other than the 33%-owned employer? Assuming the business are not otherwise related or affiliated, and all attribution rules (family, trust, and estate) are satisfied, it may be possible for nonelective contributions (up to $49,000) to be made to a SEP and a QP. Special care must be taken in computing the SEP contribution if self-employed, because the W-2 income reduces the self-employment tax, and half of that amount is used to arrive at the owner's SEP compensation (earned income). Failure to do so causes lower contributions for owners (and would likely violate other conribution rules if any nonowner employees were involved).

Hope this helps.