What kind of plan is this?

[Snaggletooth]

Client, 77 yrs old, has had a retirement plan for his employees for decades, actually starting back in the days of the old Keough plan.

Essentially, he pays 8% of their salary into a pension plan for each eligible employee. In most years, ALL of his employees are long-time and eligible. He has been paying 8% of his own income into his SEP. Employees make ZERO contributions and therefore no elective deferrals.

Here's the question. Client continues to pay this for his employees, but at his age he no longer wishes to add to his SEP and increase his RMDs, which are becoming substantial. If he pays 8% for his employees, must he contribute 8% of his income to his own SEP if he doesn't wish to do so?

Tried to research this, but I don't know what kind of a code section governs this plan. 408k? 403k? 403b? 408d? Not sure this kind of detail for rare plans exists in the Tax Book, or else don't know how to look for it.

[DaveO]

Good question and I don't know the answer but thought I'd bump it. Have you seen the plan documents?

[TXEA]

Interesting question. Is the plan a SEP plan or some other type of plan? The only reason I ask is that you mention the owner contributes to a SEP plan.

If it is a Keogh or profit sharing plan, there must be some TPA that is administering the plan for your client. I would try and visit with them.

[Lion]

If it's that old, it may be a SAR-SEP that's grandfathered in. Sorry, I know nothing about them. But, as has been suggested, you need to read the plan documents &/or talk to the plan administrator. Maybe there's an exception for your client because he's older than full retirement age -- maybe.

[Snaggletooth]

No Information in Pubs

Best I can determine, this is a classic SEP/IRA. Might qualify as a SAR SEP except it is pointless because employees are not getting deferrals.

But I have read and read and read in publications, and ALL the language concerns upper limits that an owner CAN do, but nowhere is it discussed whether the owner MUST contribute to his own plan if he contributes to his employees.

The client is 77 years old, and is pointless to contribute when his RMDs are already huge.

Thanks to all who have responded to the post. Hopefully, someone will know.

[Roland Slugg]

It must be a SEP-IRA. If it's not, he wouldn't be able to contribute to his own SEP-IRA.

Why do you (or he) think it's pointless for him to contribute to his own SEP? Yes, each contribution increases his next year's RMD, but only by a small percentage of that new contribution. At ages 77 and 78 his RMD percentage is less than 5% (divisors are 21.2 and 20.3 respectively) so for every $1,000 he contributes, his RMD will increase by less than $50 the following year. In the meantime his current year's tax savings will be $1,000 multiplied by his F&S tax rates. Furthermore, when he dies, his bene(s) can spread the inherited balance over his/their remaining life expectancy. I love SEP-IRAs, and IMO this one's a no-brainer.

[New York Enrolled Agent]

Best I can determine, this is a classic SEP/IRA. Might qualify as a SAR SEP except it is pointless because employees are not getting deferrals.

But I have read and read and read in publications, and ALL the language concerns upper limits that an owner CAN do, but nowhere is it discussed whether the owner MUST contribute to his own plan if he contributes to his employees.

The client is 77 years old, and is pointless to contribute when his RMDs are already huge.

Thanks to all who have responded to the post. Hopefully, someone will know.

Proposed Reg §1.408-7(d) states (emphasis added):

(d) Participation requirements--(1) Age and service requirements. This paragraph is satisfied with respect to a simplified employee pension arrangement for a calendar year only if for such year the employer contributes to the simplified employee pension on behalf of each individual who is an employee at any time during the calendar year who has--

I gather from your post this is not a corporate entity where the corporation is the employer. If I read your post correctly, then IMO the self-employed owner need not contribute to the SEP on his behalf.

[Snaggletooth]

Why do you (or he) think it's pointless for him to contribute to his own SEP?

Very good question, Roland, and your math works out.

The client is driving this as he wishes to stop. I can't argue with the math, but he wants to invest in stocks instead of
the mutual funds pushed by his custodian. He has also made the statement that his stocks/dividends/capitalgains will
have preferential rates, whereas his RMDs and withdrawals will be ordinary income.

I can buy into his reasoning and have no problem with it, in spite of the math.

[TXEA]

I do not think the owner can be excluded as per IRC references below (assuming self-employed individual).

------IRC 408(k)(7)(A) (SEP's)

(7) Definitions
For purposes of this subsection and subsection (l)—

(A) Employee, employer, or owner-employee
The terms “employee”, “employer”, and “owner-employee” shall have the respective meanings given such terms by section 401 (c).

------IRC 401(c)

(c) Definitions and rules relating to self-employed individuals and owner-employees
For purposes of this section—

(1) Self-employed individual treated as employee
(A) In general
The term “employee” includes, for any taxable year, an individual who is a self-employed individual for such taxable year.

(B) Self-employed individual
The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year—

(i) an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and

(ii) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year.

------IRC 408(k)(2)

(2) Participation requirements
This paragraph is satisfied with respect to a simplified employee pension for a year only if for such year the employer contributes to the simplified employee pension of each employee who—

(A) has attained age 21,

(B) has performed service for the employer during at least 3 of the immediately preceding 5 years, and

(C) received at least $450 in compensation (within the meaning of section 414 (q)(4)) from the employer for the year.

[Snaggletooth]

Not a SIMPLE

Interesting information TXEA and thank you very much. This is no doubt a SEP/IRA.

Everything I've read (far from conclusive) speaks in terms of the owner "may" contribute up to [limits described, etc].
This implies extent and leaves the reader with the idea that the owner does not have to contribute up to limits.

The owner does not have to contribute the maximum, but the question remains, "Does he have to contribute at all?"
It follows that if he may contribute less, then how much less? All the way to zero?

I believe so, absent any information to the contrary. NYEA post was helpful for his opinion, as well as yours.

[TXEA]

Snaggletooth, I am convinced that with the SEP, if a contribution is made for any employee then it MUST be made for all eligible employees.

[JON]

Sep

every account set up has to have provided SEP documentation to the financial institution who accepted it. Get a copy of whatever was given to them.

[JudyL]

Interesting information TXEA and thank you very much. This is no doubt a SEP/IRA.

Everything I've read (far from conclusive) speaks in terms of the owner "may" contribute up to [limits described, etc].
This implies extent and leaves the reader with the idea that the owner does not have to contribute up to limits.

The owner does not have to contribute the maximum, but the question remains, "Does he have to contribute at all?"
It follows that if he may contribute less, then how much less? All the way to zero?

I believe so, absent any information to the contrary. NYEA post was helpful for his opinion, as well as yours.

IF the plan is indeed a SEP-IRA, If the company makes contributions to the plan, it must contribute for all: http://www.irs.gov/Retirement-Plans/...n-Requirements

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs

If he wants to exclude himself in future, why not discontinue the SEP-IRA plan and start a SIMPLE IRA plan instead. Then he could have similar eligibility requirements if he wanted to, but then he would have the ability to choose to not participate himself. The company would have a smaller contribution, either the 2% nonelective or 3% match, instead of the 8% he's always put in the SEP. If most of the employees are long-term and are qualifying to participate in the current plan, he could tweak their compensation to adjust for the lost of benefit that is the difference between what they were getting and the match under a SIMPLE. It would cause an increase in FUTA, both 'ee and 'er FICA and Medicare, and possibly SUTA, so the new compensation should be carefully worked out.

http://www.irs.gov/Retirement-Plans/Operating-a-SIMPLE-IRA-Plan

[Lion]

At 77, is there a way to disqualify himself as an employee qualified to have SEP funds contributed by the company to his account? Can he be less than a full-time employee and not qualify, for instance?

[TXEA]

At 77, is there a way to disqualify himself as an employee qualified to have SEP funds contributed by the company to his account? Can he be less than a full-time employee and not qualify, for instance?

If he earns $450 and has worked in three of the last five years, he is eligible . Unable to restrict part-timers (even very part-timers) if they have been there long enough.