Existing DB plan - adding SEP and deduction

[Jakyasar]

Hello

Sponsor has an overfunded DB plan (active and accruing benefits). It is a family business only spouses (owners) and their children (all over age 21). It is a corporation (Sub-S).

Sponsor wants a deduction for 2019.

As DB is not a viable option for deduction and since no DC plan was input as of 12/31/19, the only option is SEP for 2019.

4 participants with a combined eligible salary of 500k where 25% deduction limit is 125k. As one participant is making 265k, limited to 56k which leaves 69k as additional deductible contribution.

The other salaries are

150k

75k

10k

Can they each get over 25% of their salaries on a pro-rata basis as long as the total does not exceed 69K? It can be done is a PS plan but not sure how SEP works here.

Thank you

[Larry Starr]

3 hours ago, Jakyasar said:

Hello

Sponsor has an overfunded DB plan (active and accruing benefits). It is a family business only spouses (owners) and their children (all over age 21). It is a corporation (Sub-S).

Sponsor wants a deduction for 2019.

As DB is not a viable option for deduction and since no DC plan was input as of 12/31/19, the only option is SEP for 2019.

4 participants with a combined eligible salary of 500k where 25% deduction limit is 125k. As one participant is making 265k, limited to 56k which leaves 69k as additional deductible contribution.

The other salaries are

150k

75k

10k

Can they each get over 25% of their salaries on a pro-rata basis as long as the total does not exceed 69K? It can be done is a PS plan but not sure how SEP works here.

Thank you

I would suggest you become aware (I would call it knowledgeable) about how a SEP work.

A couple of things; first, you will need a customized SEP document (don't use the IRS model).  Here's that rule:

If I have a SEP, can I also have other retirement plans?

               You can maintain both a SEP and another plan. However, unless the other plan is also a SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.

And this rule applies:

Must I contribute the same percentage of salary for all participants?

              Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportional to your employees' salary/wages. This means that everyone’s contribution is the same percentage of salary. 

              If you haven’t made contributions to participants’ SEP-IRAs equal to the same percentage of each participant’s compensation, find out how you can correct this mistake.

Where do you find the 25% deduction limit applicable to SEPs?  Here is the actual rule:

How much can I contribute to my SEP?

             The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:

              1.   25% of compensation, or

                2.   $57,000 for 2020 ($56,000 for 2019 and subject to annual cost-of-living adjustments for later years).

[Jakyasar]

Thank you for taking the time and explaining. It is very clear that 25% of individual salaries come into play.