What to do in SARSEP when EE deferred the max and ER wants to contribu

[Lynn Campbell]

Client has SARSEP and SEP - assume NOT TOP heavy - and one EE has deferred legal limit (15% of comp after deferrals). Now client wants to make ER contrib to all eligibles. Is the EE with the maximum deferrals locked out of the ER contrib and is this OK?

[Guest Gary Tencer]

I reviewed this for a client using the IRS Form 5305A-SEP. It appeared that the employee contributions were to be taxable in the year deffered. The employee would receive the full Employer contribution. It would be up to the employee as to weither to withdraw his contributions or consider them as a personal contribution. If it exceeded $2,000 the excess would carry to the following year. Of course excess contributions are charged an excise tax.

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[Gary Lesser]

The preferred rule is to report the amount that exceeds 15 percent on the employees W-2. Give the employee a notice explaining that their Code Section 402(h) limit--15% of compensation--was exceeded and was included on their w-2 as wages. Explain that they are treated as having made an IRA contribution and may generally use up to $2,000 of it as an IRA contribution. Beyond that it is subject to the 6 percent tax unless corrected under Code Section 408(d)(4).