Profit Sharing Plan

[geekgirldany]

S-Corp has a Profit Sharing Plan. It was established around 2000. The plan has been doing very well and 5500 have been filed every year. Sole Shareholder only contributed twice... let me say that the S-Corp contributed to the plan twice for the sole shareholder/employee.

This S-Corp now has two employees. One has been working there atleast two years and the other employee about 1 1/2 years. If I am reading the rules correctly, I have a few questions:

1. If the employees have been there for atleast 2 years then the S-Corp/Employer must allow the employee to participate?

2. If this is true then the officer/sole shareholder can not make the decision to contribute to his plan and not contribute to the other employees plan?

3. The Profit Sharing Plan is with VanGuard. The lady there recommended to the shareholder to convert it to a SEP. The only difference I see is the restrictions in employment for eligibility requirements. Three out of five years instead of two. Is there another reason why the shareholder would want to change it to a SEP?

Thank you for any help with this. I am trying my best to learn about retirement issues.

[Bees Knees]

A SEP does not require filing a 5500. Plus the 3 year rule for eligibility as you mentioned.

I’m not sure where you got the 2 year rule for your profit sharing plan. TTB, page 13-4 says:

All qualified
plans must allow employees at least age 21
with at least 1-year of service (minimum of
1,000 hours) to be eligible for participation in
the plan. [IRC §410(a)]

That rule applies to all qualified plans, except SEPs, which allow you to require 3 years of service before being eligible to participate.

[geekgirldany]

Thanks Bees. I actually got that off the Vanguard site about the two years. Did not have the taxbook in front of of me.

Am I correct in that S-Corp will have to contribute to his employees also?

[geekgirldany]

Hi everyone. I hate to bring this up again. So am I correct that if the shareholder/employee wants to contribute 25% to his retirement plan then he will have to setup accounts for his other two employees and contribute 25% to them also? Can the S-Corp make a requirement that the employee has to work 5 years before joining the plan.
This is on the Profit Sharing Plan.

[abby]

3 of 5 is the max

Hi dany

If you google the Form 5305-SEP it outlines all the allowed restrictions right at the top.

If they are converting to a SEP, I believe they need to make their choices on this form - it's not filed with the IRS, but kept by the employer on file. The broker might ask for a copy, don't know.

If someone performs services in 3 of the past five years they must be included.

The rest of your assumptions seem correct if they are converting - I see Matt's response below and realize maybe they decided against the conversion?

[Matt Sova]

Vesting

On a Profit Sharing Plan the corp has to decide, when it is set up, what the vesting schedule is. This schedule cannot be more aggressive than the following 2:

Years 1 and 2 0% Year 3 100%
or
Year 1 0
Year 2 20%
Year 3 40%
Year 4 60%
Year 5 80%
Year 6 100%

The company contributes to the plan 100% but if the employee leaves and is only 40% vested that is all he is entitled to. The remaining 60% stays within the plan and is spread to all remaining employees in the plan.

[geekgirldany]

Thanks abby and matt for responding. I called NATP before you posted. You are correct it depends on how the corporation set it up. Matt thanks for the vesting information. Abby Vanguard told him he might want to change it to a SEP. So far no decision on that.

I called the shareholder and relayed the information to him. He is going to try and find how it was setup. If he has any information at all. It was actually first setup in 1999. I told him to look in his corporate minute book and there is nothing in there about it. I hope he can find where it was first filled out.

According to the NATP most of the time they go with the general outline 21 years old, 2 years. But it can be different if the corporation decides so when the plan is first established. I am betting it was a general outline. They also stated that Vanguard would not have any of this information because they are only the fiduciary.

So I'll see. I am meeting with customer tomorrow.