DB and SEP plans

[Dinosaur]

A potential client has come to us to look into a DB plan for her in 2010. She is self employed (and only employee) but has funded a SEP in 2010. Plan not covered by PBGC.

Assuming that the contribution is more than 6% of net earned income then it looks like she cannot set up a DB plan for 2010. Can the SEP and DB plan co-exist? If the DB plan is set up in 2011 does the SEP have to be terminated and paid out in 2010?

[SoCalActuary]

Well, you have several issues here.

If the SEP was on the IRS format, you probably need to replace it with an institutional form. The IRS one will assume that you have no other plan.

If the 2010 SEP has already been funded, then you are exceptional. If it is a SIMPLE, you better check your facts, because those do get funded during the year, and they have even more restrictions on other plans.

If the SEP was funded in 2010 for the 2009 year, then you don't really have any restraints on the DB plan for 2010.

Finally, you should become aware of the combined plan deduction issues of 404(a)(7). The SEP is limited to 25% of net pay. But a DB can be added up to an additional 6%. This assumes you already have funded the 2010 SEP contribution, which is a big assumption.

[ScottR]

I agree with everything SoCalActuary said, but would add that a small DBP for 2010 might still make sense, even though the 2010 contribution might be limited to 6% of pay. Setting it up immediately will give the owner a year of participation for 2010, which will be a big plus when determining future Section 415 dollar limits.

.. Scott