401(k) catch up plus a maxed out SEP

[AJC]

A 50+ year old single owner-employee has an existing SEP, which he maxes out each year. He is asking whether he could adopt a 401(k) plan and contribute only the catch up amount in addition to continuing his SEP contributions. He has plenty of income to cover it. So for 2021, he would like to max out his SEP at $58,000 plus contribute $6,500 in salary deferrals into a new 401(k) plan. He has no reporting requirements with the SEP, and he would be exempt from filing a 5500-EZ until either his 401(k) plan reaches $250,000 or he terminates it. Thus, his only current additional cost is the 401(k) plan document. Any problematic issues with any of this?

[Bri]

Seems reasonable.

In my head I can imagine a nightmare where the SEP document won't allow the 58,000 because the 6,500 isn't catchup "yet" until the 415 limit is hit.  But a quick review of the plan document should spell out whether that's even possibly an issue or not.

And although you could instill a plan limit of 0% to the 401(k) so that the 6,500 is automatically catchup immediately, that then risks the case of wanting to do more than 6,500 because the deduction limit to the SEP won't let you do the full 58,000.

[CuseFan]

If SEP is on IRS model Form 5305-SEP, that document precludes having any other retirement plan, so he might also have the headache of finding and paying for a provider's SEP document in addition to a 401(k) document. Seems like a lot of hassle to avoid a very easy/minimal 5500-EZ (until such time as the final return is needed).

[Appleby]

Can you make a catch-up if your don't exceed the regular salary deferral limit ( whether the $19,500 or limit set by the plan if less) ? That is the question. I think the answer is no, but I recommend double checking §1.414(v)-1 to be sure.

You could make the salary deferral plus catch-up to the 401(k) and the $38,500 employer contribution to the SEP IRA ( if the is sufficient compensation to allow $38,500). But, as @CuseFansaid, you would need a prototype SEP agreement.  You might be able to get access to one at no cost , or about $75 per year. Google prototype SEP IRA agreement.

 

[Kevin C]

On 5/24/2021 at 9:19 PM, Appleby said:

Can you make a catch-up if your don't exceed the regular salary deferral limit ( whether the $19,500 or limit set by the plan if less) ? That is the question. I think the answer is no, but I recommend double checking §1.414(v)-1 to be sure.

Section 415 can also trigger catch-ups. SEP contributions are treated as contributions to a defined contribution plan under Section 415. See 1.415(c)-1(a)(2)(ii)(A).