S Corp and retirement

[Possi]

My clients, husband and wife, are physical therapists.

They formed an S Corp and are 50/50 owners.

She also works part time at a hospital, he works full time at another hospital.

Are they allowed to have a SEP under the S Corp if they already have 401K's?

I think they could, but if you could send me to a source, I'll study it!

Thanks~

[DaveinTexas]

Yes

as long as the employers are not in a controlled group (IRC Section 414), the taxpayers can participate in a 401K and a SEP IRA.

From what I can tell, there are 2 prongs. They can max out their deferrals with the 401K ($18,000 plus $6,000 catchup) and they can also max out the SEP because one prong (deferrals) are not affected by the other prong (employer contributions to SEP) because the employers are not related.

See the Example 1 from the IRS Site (this speaks of a regular job 401K and a solo 401K for the taxpayer's business):
Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2014, $17,500. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $17,500. He has enough earned income from his business to contribute the overall maximum for the year, $52,000. Greg can make a nonelective contribution of $52,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.


What I don't have a cite for is if you can do the same with a SEP (max out 401K deferrals at day job AND max out SEP IRA contribution). I read where some say yes, and then I read where some say no. But, the above example suggests this is possible as long as the employers are not related. "the limit on annual additions applies to each plan separately."

[kathyc2]

I agree with Dave, but remember that the 25% SEP only applies to the W-2 wages from the S.

[New York Enrolled Agent]

as long as the employers are not in a controlled group (IRC Section 414), the taxpayers can participate in a 401K and a SEP IRA.

From what I can tell, there are 2 prongs. They can max out their deferrals with the 401K ($18,000 plus $6,000 catchup) and they can also max out the SEP because one prong (deferrals) are not affected by the other prong (employer contributions to SEP) because the employers are not related.

What I don't have a cite for is if you can do the same with a SEP (max out 401K deferrals at day job AND max out SEP IRA contribution). I read where some say yes, and then I read where some say no. But, the above example suggests this is possible as long as the employers are not related. "the limit on annual additions applies to each plan separately."

I think they can participate in both whether or not the employers are a controlled group but the difference would be in the total amount that could be put away.

Assuming there is no controlled group, I believe the limitation in §415 in applied on a per-employer basis (§415(g)). The elective deferrals are coordinated under §402(g) and those are aggregated among all employers. However, a contribution to a SEP is not an elective deferral in the list in §402(g) (new SAR-SEPs are not permitted after 1996).

Thus I agree with the conclusion of a maximum of $18K in the 401K (with a catch-up if applicable) and a maximum of $53K in the SEP (assuming there is sufficient compensation).

[DaveinTexas]

NYEA is spot on right

Indeed, this is such a confusing topic to research so I got a little turned around. I remember reading somewhere that the $52k plus the $18K deferral could be had; I just got a little gunshy offering that advice.

I don't like to admit this too often, but the Yankee (respectfully) is right!

Have a great weekend folks!

[TAXNJ]

Here is some reference

Good post and discussion what others think it may be. Let us know if you arrive at a decision with support.


As others replied and as NYEA says "I think they can participate in both whether or not the employers are a controlled group but the difference would be in the total amount that could be put away."