Sep

[S T]

I have a S Corp client that would like to set up a SEP.

S Corp open 5/1/05, so all employees including 90% shareholder less than 3 years employed. There is a 90% shareholder and 10% shareholder, and 7 employees.

For 2006, the client's investment advisor is advising that the S Corp can set up the SEP plan and have the 7 employees sign a statement that they would rather receive a bonus in the form of wages (in December) and be excluded from the SEP, and that the bonus would not necessarily have to be a percentage equal to what the 90% shareholder would use to fund his SEP. The 90% shareholder would still be entitled to contribute to his SEP.

Does anyone have any information on this approach?

Thanks,

Sandy

[OldJack]

I don't recall an employee having an option to not participate in a SEP-IRA plan. They could of course take their contribution out immediately with the usual tax plus 10% penalty. Of course the employer can exclude certain employees by group such as those covered by a union plan. I don't believe your client can do what he wants to do with only making a contribution for himself.

[BOB W]

Look into........

.... a Simple IRA Plan. Employees can elect out, just like a 401K. Or should I say elect in.

[veritas]

I have a S Corp client that would like to set up a SEP.

S Corp open 5/1/05, so all employees including 90% shareholder less than 3 years employed. There is a 90% shareholder and 10% shareholder, and 7 employees.

For 2006, the client's investment advisor is advising that the S Corp can set up the SEP plan and have the 7 employees sign a statement that they would rather receive a bonus in the form of wages (in December) and be excluded from the SEP, and that the bonus would not necessarily have to be a percentage equal to what the 90% shareholder would use to fund his SEP. The 90% shareholder would still be entitled to contribute to his SEP.

Does anyone have any information on this approach?

Thanks,

Sandy

That registered rep needs to have a complaint filed. Now if you had a securities license end of problem (and you would make some additional income).

[Roland Slugg]

Concur with Old Jack

I don't believe your client can do what he wants to do with only making a contribution for himself.

FWIW I wholeheartedly agree. That investment advisor doesn't know what he's talking about. Can't help but wonder how good his actual investment advice could be.

[sea-tax]

I agree with the others that he can't do that. He may want to look at 401k plan because he can discriminate some classes of employees with a 401k.

[S T]

Sep

Thanks everyone, I didn't think it could be done either, but needed the confirmation so I could pass on to the client.

Thought about the Securities License, but just don't have time to follow up on that as well!

Sandy

[S T]

More SEP Help

Well the client in the above post does not like the answers at all that I am providing and the Investment Advisor keeps coming back with more scenarios.

So now we are at an impasse that they are maintaining that the 7 employees are not permanent employees and therefore should not be included in the SEP, also that they have not worked for the employer 3 out 5 years.

Employer - S Corp was started 5/05, so no way can they meet 3 out 5 years, but I am stating that the shareholder (who is also an employee) can't meet the 3 out of 5 either, so this rule will not be used, if they want to fund a SEP for 2006. Wouldn't this rule only apply to new hires after the Plan was established?

As I read the regulation, ALL employees, whether permanent, part time, seasonal or even whether they die during the year, if they are receiving payroll they must be included in the SEP plan and the Corporation needs to make the appropriate contribution.

Am I missing something?

Sandy

[veritas]

Sandy,

What ever percentage of wages the owner contributes to his Sep will apply to whoever has worked in 05 and 06 and has made at least $250 in both years(and is not covered in an union bargaining agreement).

Have you given your client something in writing explaining this?

[Bees Knees]

What ever percentage of wages the owner contributes to his Sep will apply to whoever has worked in 05 and 06 and has made at least $250 in both years(and is not covered in an union bargaining agreement).

The dollar amount is $450 for both 05 and 06, not $250.

[Bees Knees]

Sandy,

You are correct in your interpretation. Tell the client that the purpose of the 3 out of 5 year rule and the $450 rule is that the employer cannot discriminate against any employee under the plan. In order to exclude certain employees, you have to say all eligible employees must have worked at least 3 out of the last 5 years, or 2 out of the last 4 years, or 1 out of the last 3 years, etc.

The 3 out of 5 means you can’t go 4 out of 6. But you can go less. So if the employer wants to allow himself only and not the other employees, he would have to say something like no employee is eligible until they have worked more than 19 full months. The employer started working in May of 05. As of December of 06, the employer is starting his 20 month as an employee and the company can now contribute to his SEP. If all of the other employees started working in June of 05, they would not be eligible for any SEP contribution until January of 2007, of which the employer does not have to actually make such a contribution until some time in 2008 when the tax return is filed.

That is the only scenario I can think of where the employer might get to do a SEP for himself and not the other employees, unless of course you have employees making less than $450 per year.

[Joe Btfsplk]

Discrimination

The employer wants to exclude as many employees as possible and the Investment Advisor is telling him anything he thinks will induce the employer to invest with him.

He should get a different Investment advisor. You cannot discriminate or induce employees to be nonparticipants by offering them a bonus to elect nonparticipation--at least you can't legally do anything to subvert the intent of the law.

[veritas]

If I knew who his broker was I would be giving them a call about this loose cannon.

[veritas]

Sandy,

You are correct in your interpretation. Tell the client that the purpose of the 3 out of 5 year rule and the $450 rule is that the employer cannot discriminate against any employee under the plan. In order to exclude certain employees, you have to say all eligible employees must have worked at least 3 out of the last 5 years, or 2 out of the last 4 years, or 1 out of the last 3 years, etc.

The 3 out of 5 means you can’t go 4 out of 6. But you can go less. So if the employer wants to allow himself only and not the other employees, he would have to say something like no employee is eligible until they have worked more than 19 full months. The employer started working in May of 05. As of December of 06, the employer is starting his 20 month as an employee and the company can now contribute to his SEP. If all of the other employees started working in June of 05, they would not be eligible for any SEP contribution until January of 2007, of which the employer does not have to actually make such a contribution until some time in 2008 when the tax return is filed.

That is the only scenario I can think of where the employer might get to do a SEP for himself and not the other employees, unless of course you have employees making less than $450 per year.

The IRS prototype plan speaks of years not months. Also the financial institutions follow that prototype. You could do a month thing but would have to get the plan approved. Also individuals under 21 can be excluded.

[S T]

Not the right answer

Thanks everyone, once again, but I am afraid, this client and subject matter is going to continue for several days.

I have tried to supply Employer with all of the information on retirement plan options, in particular the SEP, print outs of various sources on the internet, copies from the TB, and have linked to several sites so the client can research on his own or provide to this investment advisor.

So to get ready for the next round, does anyone know what the penalty is if the client makes the choice not to fund all employees???

There seems to be no reporting to IRS, only the deductions, and what the financial institutions might supply for the accounts. So how does IRS determine whether or not a business has met all of the regulations. This is another area that the investment advisor eluded to that there was no tracking mechanism, so if the Employer did not follow the rules, would probably not be caught. What would the repurcussions be for the Investment Advisor for not following the regulations?? For Employer???

From my standpoint as an EA and tax preparer, I can not justify these choices and would have to quietly walk away from this client if this is their choice.

Just trying to assimilate all of the info and be prepared!

Thanks

Sandy