Maximum Allocation in SEP

[Guest CharlieLaur]

This is a crazy question to which I am unable to find a definitve answer.

Owner makes $245,000 and will contribute $49,000 on his behalf.

One employee makes $75,000 and owner wishes to contribute 25% of compensation for this employee.

Would it be considered a violation of the uniform allocation requirement for a SEP if the owner is receiving 20% of compensation and the employee is receiving 25% of compensation?

Logically, it should be ridiculous for the IRS to object to this scenario and I realize that we could do this if it were a regular profit sharing plan -- however, a regular profit shring plan does not have the uniform allocation requirement.

I was also fascinated by the following from the Form 5305-SEP: "The employer agrees that contributions made on behalf of each eligible employee will be the same percentage of compensation for every employee."

Has anyone ever encountered this question?

Thanks for any thoughts.

[Gary Lesser]

The best way to look at this is to say that all employees are getting the same percentage, but not in excess of the 25% allocation limit.

There are other situations where this would occur (e.g., (1) an integrated plan; (2) after plan has been integrated for 35 years in respect to a participant and some of the participants have less than 35 years and the plan is integrated; and (3) some situations where employees wages not subject to FICA (generally a young son or daughter of owner).

Hope this helps.