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Starting 401(k) and Defined Benefit Plan when a SEP is being "maintained."


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I have a potential client who has been "maintaining" a SEP for sometime. The owner has always been the only participant in the plan. There have been no contributions to the SEP during 2023. What would be the problems, if any, of starting both a 401(k) plan plus a cash balance plan during this year? I am sensitive to the word "maintaining" with regard to the SEP. If no contributions are made on account of 2023, does this imply the the SEP is not being maintained during 2023 and there should be no problems establishing the other plans?

Thanks for the help

Rick

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You are not prohibited from having a SEP and another qualified plan or plans in the same year, unlike a SIMPLE, unless the SEP is on the IRS model document FORM 5305-SEP, which prohibits having another plan. SEP contributions, if any, are treated like profit sharing so you have to be cognizant of combined plan deduction limits. If the SEP is on the 5305, I would restate onto a provider's preapproved volume submitter SEP document (which you might need to search to find one) before adopting any other plan regardless of any 2023 SEP contributions or lack thereof.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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  • 2 weeks later...

I want to be clear on what you are saying. This client has a SEP-IRA plan, she is the only participant and it was started with a 5305-SEP document. Assuming that no contributions to the plan are made in/for calendar yer 2023, can she establish a 401(k) plan and a cash balance plan in 2023 going forward? In the 401(k) plan she will make the maximum deferral and an employer contribution of 6% of Compensation. If there is no problem with this, she can than make the cash balance contribution without any restriction. Am I correct in all of this?

Thanks again for the help.

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