Off Calendar SEP - Terminating Employees

[ubermax]

Two Questions :

(1) Can a small employer , assume a C-corp , have a fiscal year = tax year = plan year for a new SEP run from 9/1/2014 to 8/31/2015 ?

(2) If the answer to (1) is "yes" , are employees who terminated prior to 9/1/2014 entitled to a contribution ?

[Belgarath]

If you are using the IRS model SEP document, then the answer to number 1 is no.

If you are using a prototype SEP document, then I do not know. If a fiscal year is allowed, I'm just GUESSING that the contribution requirement will not permit a last day requirement, but that's only a guess.

[masteff]

Code 408(k)(7)©:
"© Year
The term “year” means—
(i) the calendar year, or
(ii) if the employer elects, subject to such terms and conditions as the Secretary may prescribe, to maintain the simplified employee pension on the basis of the employer's taxable year."

But as noted above, only if you don't use the IRS model as it explicitly says calendar year.

[ubermax]

I guess then the question still remains , if a new prototype SEP is adopted 9/1/14 and also effective then and the plan and fiscal/tax years are all the same running 9/1 to 8/31, then are employees who terminate in 2014 before 9/1 entitled to a contribution ?

[Belgarath]

I took a look at the regulations - take a look at Proposed Treasury Regulation 1.408-7(d)(3), which clearly states that you cannot require an employee to be employed as of a particular date.

But, I also just took a closer look at your question and the dates involved, and realized that I was assuming incorrectly that you were asking about a "last day" requirement. Based upon your question, I see no reason why anyone who terminated prior to the effective date of the plan would receive any contribution.

[ubermax]

Belgarath, do you have a link to that Proposed reg ?

[Belgarath]

Nope, not offhand - I looked it up in my CCH Pension and Employee Benefits books. I'm a little old-fashioned - the internet is a fabulous tool, but for detailed Code, Regs, ERISA, etc. where I frequently have to flip back and forth a lot, I find it more efficient to have a hard copy.

[ubermax]

I'm looking at Code sections 408(k)(2)© and 408(k)(7)© ---------- the terminated employee obviously didn't have comp for that first fiscal year beginning 9/1/2014 --- I'd have to read that proposed reg for context but I would think the Code would have more weight than a proposed reg. and this seems different than a "last day rule" .

[Belgarath]

From my earlier post. Perhaps you didn't see this part - as you can see, I agree that in the situation you posit, no contribution for the employee who terminated prior to the effective date of the plan.

"But, I also just took a closer look at your question and the dates involved, and realized that I was assuming incorrectly that you were asking about a "last day" requirement. Based upon your question, I see no reason why anyone who terminated prior to the effective date of the plan would receive any contribution."

[masteff]

I'm looking at Code sections 408(k)(2)© and 408(k)(7)© ---------- the terminated employee obviously didn't have comp for that first fiscal year beginning 9/1/2014

I didn't address the 2nd question in your original post because while it may have seemed valid at the time you asked it, when the definition of the word "year" is applied to the Code, the question becomes moot for the exact reason you state.

You would have to screw up the effective date of the plan (such as by making it effective 8/31/2014, rather than 9/1/2014, with a 9/1-8/31 plan year) for the terminated employee in question to receive a benefit.

[Gary Lesser]

If the FY is used as the PY, then performing service for eligibity is determined on a PY basis. Assuming this was a new plan, then no, since the employee was not employed at any time during the plan year.

OTOH, if an existing plan, then the employee wd appear eligible for a contrtribution for the (prior) 2013-2014 plan year.