Employer's S-Corp has a SEP plan, where the company contributes $100 per month to all eligible employees, including himself. The company deducts these payments. Can any of these employees, including himself, make a voluntary contribution to this plan? As long as they do not exceed the limitations? And if so, would they deduct it somewhere?
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A SEP is just a special type of an IRA. The company's employees can contribute to their own respective IRAs if they otherwise meet the eligibility rules.Roland Slugg
"I do what I can." -
How is he getting away with $100 per month to everyone's SEP?
Unless they all earn exactly the same, this would disqualify the SEP."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Yes, that much I understand. What I needed to know is, can the employee make voluntary contributions into this particular Company plan? It appears that they cannot. See attached from Fidelity, in which it says under SEP-IRA, "Funded solely by employer contributions." https://www.fidelity.com/retirement-.../compare-plans. TTB-13-15 says "The employer, and not the employee, makes deductible contributions to the employee's SEP-IRA." One of my SCorp employer/clients made a personal contribution into his plan. So he needs to take it out, IMO, and set up a separate SEP (for his self-employment income from another source.)Comment
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The custodian won't question it.
They stay as far away as possible from having anything to do with the correct calculation because they don't want the liability.
But I think the employer will have a BIG problem if they are ever audited.
SEP contribution rules are very strict - the SEP contribution must be the exact same percentage of each qualifying employee's compensation across the board.
No exceptions that I'm aware of."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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IRS SEP FAQs. I think a couple of them answer your questions, plus some of the other ones raised in the replies.Comment
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Can I make catch-up contributions to my SEP?
No, SEPs are funded by employer contributions only. Catch-up contributions apply only to employee elective deferrals. However, if you are permitted to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up IRA contributions.
Note: Elective deferrals and catch-up contributions are not permitted in SEP plans.
I agree, you may want discuss the current $100 per employee contribution and have it changed to a percentage of income.Comment
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Flat Dollar Formula
There are three formulas that may be used to allocate contributions to a SEP-IRA: a flat dollar amount, a specified percentage of eligible compensation or a Social Security integration formula. With the first formula each employee receives a contribution of the same dollar amount. Under the second formula, every employee receives a contribution of the same percentage of eligible compensation. If the employer decides on 10%, then all employees receive a contribution amounting to 10% of their eligible compensation, not to exceed the IRS limitation of $41,000.
Apparently, the flat dollar formula works, he just needs to make sure one employee's account doesn't receive more than the other.Circular 230 Disclosure:
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That's interesting.
I'd never heard of the flat dollar formula."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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From the IRM
4.72.17.6 (09-12-2006)Originally posted by Burke View Post
Contributions
Under IRC 408(k)(5), SEP contributions must be made under a written allocation formula. A SEP may provide that contributions are a fixed percentage of employees’ compensation, a fixed dollar amount for each participant, or that contributions are to be determined each year by the employer (a discretionary contribution). Discretionary contribution formulas are the most common. The employer may uniformly vary the percentage of compensation contributed year by year or contribute nothing for a particular year, but the SEP document must state how the employer contribution will be allocated. An employer may vary the formula or percentage from year to year (for example, to change from a fixed contribution to a discretionary contribution), provided the SEP is timely amended.Circular 230 Disclosure:
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Yes, this is helpful. So to summarize, apparently you can make IRA contributions into the Company SEP plan, (if the plan allows it) but you may not be able to deduct them. I don't see the feasibility of putting non-deductible IRA contributions into a Company SEP-IRA plan which will be fully taxable when withdrawn. I don't like co-mingling taxable/non-taxable contributions and having to track via 8606 every year. Be that as it may, in this case the more-than-2% shareholder/employee would not qualify for a deductible IRA of any amount due to his income. He's phased out. Even for a ROTH. So a separate SEP based on his (other) self-employment income seems to be the only option for him.Originally posted by BP. View PostComment
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You are most welcome!
Have a great week!Circular 230 Disclosure:
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