Combined DB/DC plan

[scarabrad]

If one is making a maximum allowable DB plan contribution for plan year and intends on making a 6% net schedule C income profit sharing contribution to a DC plan, as well, can that 6% additional contribution be made to a previously established SEP-IRA that hasn't been funded for the past 2 years or need one set up a 401(k) plan to make that 6% contribution?

Thanks in advance!

SR

[Effen]

You need to set up a profit sharing plan. You can add the 401(k) feature if you want, but it isn't necessary.

If you fund the SEP, you lose the ability to deduct the db contribution.

[frizzyguy]

Maybe I'm mistaken but I believe you can fund a SEP and a DB plan. I am fairly confident on that, I just had a SARSEP/CBP audit that passed. It's SIMPLE's that have that rule. The best thing for your client would be to do a 401k plan though because they would be allowed to put 6% plus DB max plus deferrals.

[Effen]

401(k) Answer Book - Great-West Retirement Services,Q 22:48,If an employer has a SEP, can it also have other retirement plans?

Last Updated: 10/2012

Yes. An employer can maintain both a SEP and another retirement plan. Unless the other retirement plan is also a SEP, however, the employer cannot use Form 5305-SEP. The employer must adopt either a prototype SEP or an individually designed SEP. Additionally, the SEP must be aggregated with any qualified plan(s) of the employer for deduction and contribution limits. [ I.R.C. § 404(h)]

My understanding is the only way they could maintain both a db and a SEP is if it is a "prototype SEP" or an "individually designed SEP". Both are generally cost prohibitive and most likely not what is being used. However, you are correct, that it is possible, but not very likely.

[SoCalActuary]

401(k) Answer Book - Great-West Retirement Services,Q 22:48,If an employer has a SEP, can it also have other retirement plans?

Last Updated: 10/2012

Yes. An employer can maintain both a SEP and another retirement plan. Unless the other retirement plan is also a SEP, however, the employer cannot use Form 5305-SEP. The employer must adopt either a prototype SEP or an individually designed SEP. Additionally, the SEP must be aggregated with any qualified plan(s) of the employer for deduction and contribution limits. [ I.R.C. § 404(h)]

My understanding is the only way they could maintain both a db and a SEP is if it is a "prototype SEP" or an "individually designed SEP". Both are generally cost prohibitive and most likely not what is being used. However, you are correct, that it is possible, but not very likely.

Prohibitive? How costly are they? Don't any major institutions have them for customer use?

[frizzyguy]

401(k) Answer Book - Great-West Retirement Services,Q 22:48,If an employer has a SEP, can it also have other retirement plans?

Last Updated: 10/2012

Yes. An employer can maintain both a SEP and another retirement plan. Unless the other retirement plan is also a SEP, however, the employer cannot use Form 5305-SEP. The employer must adopt either a prototype SEP or an individually designed SEP. Additionally, the SEP must be aggregated with any qualified plan(s) of the employer for deduction and contribution limits. [ I.R.C. § 404(h)]

My understanding is the only way they could maintain both a db and a SEP is if it is a "prototype SEP" or an "individually designed SEP". Both are generally cost prohibitive and most likely not what is being used. However, you are correct, that it is possible, but not very likely.

Prohibitive? How costly are they? Don't any major institutions have them for customer use?

Most do have one. They even have SARSEPs. This topic was a very large chunk of an audit. I had a client who had a SARSEP who changed providers three times around EGTRRA and I got to play find the adoption agreement. They are usually "free". That being said, I usually get them to switch to a 401k. If they are going DB, they are looking for the deductions and the deferrals really help in a solo plan situation.

[Effen]

Looks like I learned something today. I always had thought prototype SEPs were possible, but didn't really exist in the real world.

This is good to know for future reference.

[AndyH]

Effen, what was your concern about the loss of the DB deduction? I would have thought no matter what the DB minimum was deductible.

[Effen]

if they had already funded the Sep then they would not be able to deduct the db, unless they were somehow able to withdraw the Sep deposit, which I didn't think was kosher. I assumed the Sep had already been funded, which meant no db. Are you suggesting they could deduct the db but not the Sep?

[AndyH]

if they had already funded the Sep then they would not be able to deduct the db, unless they were somehow able to withdraw the Sep deposit, which I didn't think was kosher. I assumed the Sep had already been funded, which meant no db. Are you suggesting they could deduct the db but not the Sep?

Yes, why not?. It is the SEP that has the exclusive plan rule. The DB just has 404(a)(7) doesn't it? I could be missing something, but I don't know what. WDIK?

[Effen]

I leave that kind of stuff for the lawyers and accountants to decide.

[AndyH]

I leave that kind of stuff for the lawyers and accountants to decide.

Certainly cannot argue with that. It is just that the SEP sponsor's ERISA attorney and CPA can be hard to get a hold of the last week of December when they want to put in a plan that day.